## FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSCS) — SUMMARY ASSESSMENTS, MAY 2012

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### I. Basel Core Principles for Effective Banking Supervision — Introduction and Methodology
- Assessment completed as part of an IMF Financial Sector Assessment Program (FSAP) update undertaken during February 2012.
- Assessment reflects the regulatory and supervisory framework in place as of the date of completion.
- Focus on Banco de España (BdE) as main supervisor; did not cover specificities of savings banks (Cajas) under shared responsibility with Autonomous Communities (CCAAs). Where BdE prudential regulation and supervisory processes apply to the Caja segment, the assessment is applicable to Cajas.
- At the date of the BCP assessment, almost all the Cajas, with two small exceptions, had transferred their banking activities to commercial banks; the role of CCAA supervision in the financial sector was therefore reduced.
- Authorities agreed to be assessed according to the Core Principles Methodology issued by BCBS in October 2006; assessment used revised content and methodological basis with heightened focus on risk management practice and supervisory assessment.
- Assessment team: Fabiana Melo and José Tuya.

### Institutional and Macroeconomic Setting and Market Structure — Key Statistics and Context
- Construction and real estate loans:
  - Grew from 10 percent of GDP in 1992 to 43 percent in 2009.
  - Amounted to about 37 percent of GDP at end-2011.
- Banks’ total assets amounted to about 320 percent of GDP; largest five banks accounted for more than 70 percent of total assets.
- Nonbank financial entities represent less than 5 percent of total assets.
- Savings bank sector consolidation:
  - Number of institutions reduced from 45 to 18 through intervention, mergers, or takeovers.
  - FROB had taken over five institutions (8 percent of the system).
- Government measures during mission fieldwork:
  - Banks raised capital in response to EBA requirements.
  - Government issued new measures in February requiring additional capital and provisioning for problematic exposures to real estate and measures to encourage further consolidation.

### Financial Safety Net and Resolution Framework — Structure and Constraints
- Key entities:
  - Fondo de Garantía de Depósitos (FGD): private legal entity wholly prefunded by member credit institutions; merged by Royal Decree-Law 16/2011 of October 14, 2011.
    - FGD resources may be used for preventive measures and bank reorganization under specific safeguards.
  - Fondo de Reestructuración Ordenada Bancaria (FROB): established by Royal Decree Law 9/2009 to assist and foster reorganization of Spanish banking industry.
    - FROB received initial capital from FGD and from the state.
    - FROB can issue securities guaranteed by the state up to three times its capital, and can leverage up to six times with ministerial approval.
    - FROB administered by a governing committee of nine members: four proposed by BdE (including deputy governor who acts as chairperson), two from MoE, and three representing FGDs.
- Resolution and intervention responsibilities shared among BdE, FROB and MoE:
  - BdE triggers determination that solvency and liquidity are jeopardized and activates intervention.
  - FROB acts as administrator, prepares restructuring plans and may provide financial support; FGD may provide support once restructuring plan approved.
  - If restructuring plan fails, alternative is revocation of bank license (by the Council of Ministers) and court-driven bankruptcy.
  - Resolution authorities cannot fully allocate losses to shareholders and creditors, or revoke a license (except MoE in specific cases), making process convoluted.

### Main Findings — Supervisory Effectiveness, Timeliness, and Legal Constraints
- Strengths:
  - Core supervisory process at BdE is strong, supported by qualified staff and an experienced cadre of inspectors.
  - Progress since 2006 FSAP includes tightening regulatory capital and loan-loss provisioning requirements for real estate exposures and guidance on best practices for lending.
  - BdE has a risk-based supervisory model supported by a well-developed information technology system; permanent onsite presence at 16 banks at time of assessment.
  - BdE conducts supervisory colleges for its two largest banks and for a medium-sized bank and has signed MoUs with relevant supervisors.
- Areas of concern:
  - Closure of supervisory work and timeliness of remedial action not sufficiently timely or effective for bank resolution.
  - Enforcement tools not widely used (e.g., cease and desist orders, strict dividend limits, stringent funding reviews).
  - Legal constraints:
    - BdE lacks authority to issue prudential regulations except where delegated by law or MoE.
    - BdE must send more grave enforcement issues to MoE; sanctioning powers and some regulatory powers reside with MoE.
    - Presence of the Secretary General of the Treasury on BdE Governing Council (voting capacity) and MoE role in regulation are not conducive to full independence.
- Concentration and related party risks:
  - Concentration risk and related party lending played a significant role in distressed institutions, particularly Cajas.
  - Related party exposures included non-consolidated real estate enterprises and public entities or organizations linked to governance bodies of Cajas.
  - High sectoral (real estate) and geographical concentration from consolidation of Cajas heightens systemic risk; assessors not confident current framework (ICAAP + internal controls) is sufficient.

### Supervisory Processes, IT and Consolidated Supervision — Operational Findings
- ICAAP / Pillar 2:
  - Pillar 2 implementation was a significant BdE focus.
  - Standard format for banks' Internal Capital Adequacy Assessment Program designed; reporting initiated in 2008; BdE staff meets banks annually.
  - IAC (ICAAP) implementation slowed by mergers and crisis management; not yet fully applied to all institutions.
- Information systems:
  - BdE’s IT infrastructure provides extensive supervisory information and electronic audit trail for supervisory reports.
  - Central de Información de Riesgos (CIR) and System of Information on Borrowers (SIA) provide large-exposure and concentration analytics.
- Consolidated supervision:
  - BdE has broad authority to conduct consolidated supervision on solo and consolidated basis irrespective of location or legal structure.
  - Relies on parent bank reporting and coordination with domestic and foreign supervisors.

### Enforcement and Corrective Powers — Observations and Recommendations
- Observations:
  - Inspections identify key risks and communicate them to bank management, but formal corrective actions were lengthy and not always timely.
  - BdE often followed a deliberate process and did not fully employ all enforcement tools; preference to encourage market solutions (mergers) before closures.
  - From 2007 to 2010: only one sanctioning procedure initiated against banks and two against saving banks despite several institutions with serious deficiencies.
- Recommended supervisory process improvements (excerpt):
  - Review enforcement procedures to expedite earlier actions.
  - Add weight to inspectors' written communications at inspection conclusions.
  - Link letters of requirement to risk-based benchmarks and risk matrix trends.
  - Consider BCBS “Supervisory Guidance on Dealing with Weak Banks” for preventive and corrective tools.

### Explicit Recommended Actions (selected, preserving original numbering)
- 1.1 Responsibilities and objectives
  - Change legal regime to clearly preserve sole and exclusive roles of BdE in prudential oversight of financial institutions, avoiding inconsistency in division of responsibilities.
- 1.2 Independence, accountability and transparency
  - Amend LABE to give BdE operational independence in its supervisory function in line with its independence as a Eurosystem central bank.
  - Make internal governance structures (selection, nomination and responsibility processes for supervision) clear and publicly available to assure and communicate independence of supervisory processes.
- 1.3 Legal framework
  - Introduce changes to transfer most regulatory powers currently under the MoE to enable BdE to promulgate prudential rules.
- 1.4 Legal powers
  - Introduce changes to transfer most sanctioning powers currently under the MoE to BdE.
  - Consider granting BdE licensing revocation authority in appropriate circumstances.
- 3. Licensing criteria
  - Ensure licensing criteria, in particular fit and proper requirements for senior management, are fully applied as restructuring continues.
- 4. Transfer of significant ownership
  - Ensure governance of new institutions fully complies with requirements of this CP as restructuring continues.
- 7. Risk management process
  - Ensure IAC (ICAAP) implementation continues and is fully integrated into BdE's matrix for the whole system.
- 9. Problem assets, provisions, and reserves
  - Ensure completion and implementation of reforms to collateral appraisal requirements.
  - As dynamic provisioning fades as a supervisory tool, review provisioning requirements to ensure adequacy of loss protection.
- 10. Large exposure limits
  - Improve tools and controls for supervision of economic sector concentration; issue guidance/regulation specific to sector concentration; require banks to pursue adequate diversification and include stress test impacts in concentration management.
- 11. Exposure to related parties
  - Ensure conflict of interest rules are enforced and related party lending monitored and control tools updated given new organizational structures from restructuring.
- 23. Corrective and remedial powers of supervisors
  - Review enforcement procedures to implement earlier notification, raise expectations of required action based on risk benchmarks, and adopt parallel actions to protect assets and capital alongside escalation.

### Authorities’ Response — Summary
- Spanish Treasury and BdE appreciated the IMF assessment and strongly support the FSAP.
- Authorities share main views and appreciate recommendations; stress determination and effort to address challenges and ongoing deep restructuring of savings banks with improved transparency and professional management.
- Spain involved in international efforts on bank resolution (FSB Key Attributes and European Commission proposals).
- BdE explained factors slowing restructuring: lack of adequate resolution instruments until 2009; more protracted economic deterioration than anticipated; government preference for limited public funds and private solutions; limited interest from large international institutions; inability to impose bondholder write-downs without systemic consequences; governance complexity of Cajas; CCAA role in approving mergers.

---

### II. Assessment of Insurance Core Principles (ICP) — Overview, Market Metrics, and Main Findings

### Scope, Methodology and Key Market Statistics
- Assessment benchmarked against revised ICPs issued by IAIS in October 2011; considered laws, regulations, supervisory practices and market data at time of assessment.
- Assessment conducted by Dr. Rodolfo Wehrhahn and Mimi Ho during February 1–21, 2012.
- Market metrics:
  - Life insurers accounted for about half of total gross premium written in 2010 and held approximately 80 percent of total industry assets.
  - Industry assets at end-2010: EUR 242.3 billion, or 22.8 percent of GDP.
  - 27 composite insurers accounted for 53 percent of total industry assets.
  - Holdings in sovereign debts are around a quarter of investment assets and around thirty percent in corporate debt.
  - CCS reserve fund at end-2011: EUR 7.8 billion; staff strength: 353.
  - Annuity premium growth rate: 48 percent from 2008 to 2010.
  - Total written premiums increased in each of the past five years except for a decline of 6 percent in 2010.
  - 2011 first nine months’ ROE: over 15 percent in non life and 13.5 in life.
  - Under Solvency I the industry shows on average a sound solvency margin of around 200 percent above required capital in life and 350 percent in nonlife.

### Main Vulnerabilities and Resource Constraints
- Lack of sufficient resources to effectively carry out supervisory objectives:
  - DGSFP operating budget in 2011: EUR 12.8 million.
  - Registration fees collected in 2011: about EUR 700,000 (turned over to the Treasury).
  - DGSFP deploys 31 staff to handle public complaints.
  - Six analysts responsible for off-site monitoring of 280 insurers.
  - On-site inspection cycle: 4 to 5 years given current resources.
- Concentration of guarantees in life business:
  - A third of life insurance business carries guarantees backed by sovereign and corporate bonds.
  - Adoption of Solvency II could result in additional capital requirements; QIS 5 showed a breadth of results requiring further calibration.
- Product disclosure weaknesses for life insurance:
  - UNESPA voluntary guidelines exist; DGSFP should be empowered to standardize point-of-sale and ongoing disclosure.

### Supervisory Findings by ICP (highlights)
- ICP 1 / ICP 2:
  - Primary legislation defines supervisory objectives; DGSFP delegated day-to-day responsibility by MEC.
  - DGSFP is a department within MEC, funded by State budget; not administratively independent but operates transparently and has full operational independence except on market access and administrative sanctions for very serious infringements.
- ICP 7 / ICP 8 / ICP 9:
  - Corporate governance requirements limited; internal control and reporting improvements introduced, but more detailed requirements recommended.
  - Supervisory review and off-site monitoring heavily reliant on quantitative ratios; lack of integrated qualitative risk-ranking and limited inspection frequency.
- ICP 12:
  - Policyholders have priority rights to assets covering technical provisions in winding-up.
  - Out of 19 winding-up cases between 2007 and 2011, policyholders were paid 100 percent in all cases except two (paid 52.4 percent and 84.1 percent).
- ICP 14 / ICP 17:
  - Valuation under Solvency I does not explicitly recognize best estimate of future cash flows or a margin for adverse experience; real estate revaluation every three years. Pending Solvency II expected to address discrepancies.
  - Current solvency regime lacks risk-sensitive, total balance sheet approach; recommends scenario testing and formalization of supervisory engagement when solvency margin at risk.
- ICP 18 / ICP 19:
  - Intermediaries register mixes natural persons and legal entities; disclosure of remuneration limited; bancassurance distribution significant (75 percent of individual life and 45 percent of group life sold through banks in 2010).
  - Point-of-sale disclosure required but investment strategies not included; ongoing annual statements recommended for investment policies.
- ICP 23 / ICP 24:
  - Group-wide supervision extends to all legal entities in an insurance group; DGSFP participates in 23 supervisory colleges and is group supervisor for two international groups.
  - DGSFP publishes comprehensive market statistics but should develop macroprudential surveillance including mandatory industry-wide stress tests and sensitivity/scenario testing.

### Recommendations (ICP-aligned summary, selected)
- Supervisor (ICP 2)
  - Enhance operational independence; delegate power over market access and administrative sanctions on very serious infringements to DGSFP.
  - Increase resources; consider alternative funding models; consider delegating complaint handling to an industry ombudsman.
  - Issue conflict of interest policies and update Insurance Contract Law (LCS) without delay.
- Licensing and suitability (ICP 4–5)
  - Expand fitness and propriety assessments to include key individuals in control positions and improve ongoing reporting requirements.
- Corporate governance and risk management (ICP 7–8, 16)
  - Establish a comprehensive Code of Corporate Governance; develop enterprise-wide ERM regulatory framework; strengthen internal control scope and duties of key control functions (internal audit, risk management, actuarial, compliance).
- Valuation and capital (ICP 14, 17)
  - Address Solvency I deficiencies by implementing Solvency II; require valuation to reflect best estimate of future cash flows and margin for adverse experience; re-value real estate annually.
  - Introduce regular scenario testing to assess solvency impacts and formalize early supervisory engagement.
- Reinsurance and liquidity (ICP 13)
  - Require timely finalization of reinsurance contracts, prohibit reinsurance side letters, and consider payment patterns of reinsurance claims in liquidity management.
- Conduct, intermediaries and disclosure (ICP 18–20)
  - Improve intermediary registry, require disclosure of financial interest/commission, require point-of-sale disclosure of investment strategies and annual policy value statements.
  - Consider industry-wide independent ombudsman to handle public complaints.
- Macroprudential surveillance (ICP 24)
  - Provide context to market statistics by including macroeconomic factors; develop mandatory industry-wide stress tests and scenario testing; consider regional and global market developments.

### Authorities’ Response — Insurance
- Spanish authorities expressed gratitude, agreed sector supervised under a sound regulatory framework, and committed to address resource constraints and autonomy when economic circumstances allow.
- Authorities noted steps already taken and ongoing Solvency II transposition will address product disclosure and capital concerns.

---

### Securities Market Assessment (CNMV) — Institutional Structure, Market Metrics and Key Findings

### Assessment process and institutional setup
- Assessors relied on CNMV self-assessment, review of laws and reports, supervisory files, and meetings with CNMV, BdE, ICAC, MEC and market participants.
- CNMV responsibilities: regulation and supervision of securities and derivatives markets, disclosure obligations of issuers, investment services, and collective investment schemes.
- Authorization of intermediaries and market infrastructure providers is responsibility of MEC based on CNMV recommendation.
- Regulations can only be issued by Government or MEC; CNMV issues binding Circulares only when expressly permitted.
- CNMV governance: board (Consejo) of seven members including two ex-officio members (Secretary General of the Treasury and Deputy Governor of BdE); board delegates day-to-day functions to an Executive Committee.
- CNMV is self-funded but requires government approval to hire additional staff.

### Market structure and key statistics (as of late 2011)
- Spanish savings and investments totalled approximately 1,758 billion Euros at 30 September 2011.
  - 57 percent held in deposits with credit institutions.
  - 26 percent in mutual funds or direct market investments.
- Issuers:
  - December 2011: 130 companies listed on main Spanish equities market.
  - Total market capitalization: € 421 billion (or approximately 39 of Spain’s GDP). [Note: table later indicates € 492 billion — see market data tables in source.]
  - Stocks in financial companies account for almost 31 percent of total market capitalization; banks account for over 90 percent of this figure.
  - Top ten companies represent over 60 percent of total market capitalization.
- Fixed interest market:
  - December 2011: 611 issuers of fixed interest products; total of 4,382 issues available; total outstanding € 882.4 billion.
- Intermediaries (December 2011):
  - 94 investment firms (49 broker dealers and 45 brokers).
  - 187 banks and other credit institutions authorized to carry out investment services.
  - 2,377 European firms notified CNMV to provide investment services in Spain (36 operate through branches; remainder via passport).
- Collective Investment Schemes (November/December 2011):
  - 5,460 CIS vehicles registered (2,341 investment funds; 3,056 SICAVs; 36 hedge funds; 27 fund of hedge funds).
  - Total assets under management at November 2011: € 156 billion (€ 132.4 in investment funds; € 23.6 in SICAVs).
  - Banks and credit institutions manage more than 90 percent of total assets under management.

### Main findings — mandate, powers, independence and enforcement
- CNMV mandate clear under LMV, with manuals to support consistent decision-making and public consultation for circulares.
- Legal framework does not provide full CNMV independence: MEC representation on board, MEC responsibilities for certain key decisions, and requirement for government approval to hire staff limit independence.
- CNMV has comprehensive powers to request information, inspect regulated entities, and a broad set of enforcement tools including money penalties.
- CNMV has automated systems for market abuse detection, front-line oversight arrangements with BME, and powers to share information under IOSCO MMoU.
- Use of on-site inspections is limited; CNMV advised to intensify on-site work, especially for banks due to their dominant role in securities markets.
- CNMV has been active in market abuse investigations; increased referrals to prosecutors though limited convictions to date.

### Market infrastructure and conduct
- BME Group operates regulated markets and centralised securities depository IBERCLEAR; MEFFCLEAR is CCP for repos on Spanish public debt transactions.
- Pre- and post-trade transparency requirements apply to all BME and MFAO markets.
- Naked short selling prohibited; failed settlements must be notified; Iberclear empowered to order replacement purchases at seller expense.
- CIS regulation: assets must be entrusted to a depository; valuation at fair value; CNMV guidance for illiquid assets.

### Recommended action plan (selected)
- Principle 1: Seek legal reform to align regulation between unit-linked insurance products and securities; short-term CNMV-DGSFP working group recommended.
- Principle 2–3: Strengthen CNMV independence and rulemaking powers; consider removal of MEC representation on board; ensure financial autonomy and capacity to hire/retain expertise.
- Principle 12: Review and expand inspection program; consider streamlined procedure for objective breaches (e.g., late filing).
- Principle 16: Continue active monitoring of bank disclosures to retail investors.
- Principle 19/24/31: Review inspection program coverage for credit institutions and investment firms; calibrate balance between off-site, thematic and on-site work.
- Principle 32: Consider implementing an early warning system more directly connected to solvency requirements.
- Principle 36: Complete implementation of cross-market surveillance system.

### Authorities’ Response — Securities
- Spanish authorities broadly agree with assessment and view FSAP as useful.
- On CNMV board composition, authorities do not fully share IMF concerns about Ministry presence: argue one vote provides communication channel and enriches debates; day-to-day technical matters not referred to Board.
- Authorities support PRIP initiative to harmonize regulation for substitutable retail investment products.
- On lower grades compared with 2006 FSAP for some principles, authorities emphasize change in required standards rather than deterioration; assert supervision has been strengthened.

*Italic: Source: IMF — FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE: SPAIN — REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSCS) — SUMMARY ASSESSMENTS, MAY 2012*

### 2012. The views expressed in this document are those of the staff team and do not necessarily reflect

### FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSCS) — SUMMARY ASSESSMENTS, MAY 2012

### I. Basel Core Principles for Effective Banking Supervision — Introduction
- Assessment completed as part of an IMF Financial Sector Assessment Program (FSAP) update undertaken during February 2012.
- Reflects the regulatory and supervisory framework in place as of the date of completion of the assessment.
- Not intended to assess merits of EU regulatory framework or to represent analysis of restructuring processes of the savings banks sector (these are addressed in the broader FSAP exercise).
- Assessment focused on the Banco de España (BdE) as the main supervisor of the banking system and did not cover the specificities of regulation and supervision of savings banks (Cajas) under shared responsibility with Autonomous Communities (CCAAs). Where BdE prudential regulation and supervisory processes apply to the Caja segment, the assessment is applicable to Cajas.
- At the date of the BCP assessment, almost all the Cajas, with two small exceptions, had transferred their banking activities to commercial banks; the role of CCAA supervision in the financial sector was therefore reduced.

### Information and Methodology Used for Assessment
- The Spanish authorities agreed to be assessed according to the Core Principles Methodology issued by the Basel Committee on Banking Supervision (BCBS) in October 2006.
- The current assessment was performed according to a revised content and methodological basis compared with the previous BCP assessment carried out in 2006; the revised BCP place a heightened focus on risk management and its practice by supervised institutions and its assessment by the supervisory authority.
- The assessment team reviewed laws, rules, and guidance, and held extensive meetings with BdE officials and additional meetings with the Ministry of Economy (MoE), rating agencies, auditing firms, and banking sector participants.
- Authorities provided a comprehensive self-assessment and detailed responses to questionnaires and facilitated access to supervisory documents, files, staff, and systems.
- Assessment team comprised Fabiana Melo and José Tuya.

### Institutional and Macroeconomic Setting and Market Structure — Overview
- Spain experienced the bursting of a real estate bubble after a decade of economic expansion.
- Construction and real estate loans grew from 10 percent of GDP in 1992 to 43 percent in 2009, and amounted to about 37 percent of GDP at end-2011.
- Spanish banks funded increasing exposures largely in capital markets and abroad.
- Banks’ total assets amounted to about 320 percent of GDP, with the largest five banks accounting for more than 70 percent of total assets.
- Nonbank financial entities represented a small share of the financial sector (less than 5 percent of total assets).
- Significant consolidation occurred in the savings bank sector; reforms and financial support from the state-owned recapitalization vehicle, the Fondo de Reestructuración Ordenada Bancaria (FROB), were instrumental.
- Number of institutions reduced from 45 to 18 through intervention, mergers, or takeovers.
- Tighter capital requirements led many savings bank groups to spin off banking activities into newly created commercial banks.
- FROB had taken over five institutions (8 percent of the system); one intervened bank had been recently auctioned off, another was in the pipeline, and the takeover of a small, ailing bank was underway.
- Sector under severe pressure at time of assessment; banks raised capital in response to EBA requirements but profitability had deteriorated.
- Government issued new measures in February (while mission was in the field) requiring additional capital and provisioning for problematic exposures to real estate and measures to encourage further consolidation.

### Preconditions for Effective Banking Supervision
- Regulation and supervision of financial institutions and securities markets performed by three main agencies:
  - Banco de España (BdE): oversight of credit institutions (regional governments retain some regulatory and supervisory powers over savings banks).
  - Comisión Nacional del Mercado de Valores (CNMV): securities markets supervision.
  - Dirección General de Seguros y Fondos de Pensiones (DGSFP) within the Ministry of Economy and Finance (MoE): supervision of insurance companies and pension funds.
- Oversight and supervisory responsibilities regarding payments and settlement systems are split: BdE and CNMV respectively.
- Improvements in legal and regulatory framework for transparency and governance of publicly traded institutions since 2006:
  - For traded companies and issuers whose securities are traded on an official secondary market, consolidated financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS); individual financial statements prepared under domestic Spanish standards.
  - Domestic Spanish standards largely assimilated to IFRS; differences include allowance to capitalize research expenses and lack of certain IFRS valuation options (mainly real estate and intangible assets).
- Instituto de Contabilidad y Auditoría de Cuentas (ICAC) sets Spanish accounting standards; attached to MoE; consultative committee includes CNMV, BdE, and DGSFP.
- BdE has delegated authority from the MoE to establish accounting standards for banks and coordinates with ICAC.
- BdE, as member of the Eurosystem, may provide Emergency Liquidity Assistance (ELA) within System restrictions.
- Financial safety net complemented by:
  - Fondo de Garantía de Depósitos (FGD) — a private legal entity wholly prefunded by member credit institutions; originally three FGDs (commercial banks, savings banks, credit cooperatives) merged by Royal Decree-Law 16/2011 of October 14, 2011.
    - FGD resources may be used for preventive measures and bank reorganization under specific safeguards.
    - FGD has a wide range of intervention powers and, with BdE, was the main crisis management instrument until creation of FROB.
  - Fondo de Reestructuración Ordenada Bancaria (FROB) — explicit objective to assist and foster reorganization of Spanish banking industry (Royal Decree Law 9/2009).
    - FROB received initial capital from FGD and from the state.
    - FROB can issue securities guaranteed by the state (and/or seek other funding) up to three times its capital, and can leverage up to six times with ministerial approval.
    - FROB administered by a governing committee named by the MoE, formed by nine members: four are proposed by the BdE (including the deputy governor who acts as chairperson), two members are from the MoE, and three members representing the FGDs.
- Resolution and intervention framework shared among BdE, FROB, and MoE:
  - BdE is the triggering authority to determine that solvency and liquidity of a bank is jeopardized and to activate intervention.
  - FROB is appointed as administrator with managerial powers, makes inventory, prepares and submits a restructuring plan to BdE, and may provide financial support to the problem bank (FGD may also provide support once restructuring plan is approved).
  - FROB submits restructuring plan also to MoE and the Minister of Finance and Public Administrations analyzing impact on public finances.
  - If restructuring plan fails, alternative is revocation of bank license (by the Council of Ministers) and, in case of insolvency, initiation of a court-driven bankruptcy process.
  - The resolution authorities (in principle BdE, FROB, and MoE) cannot fully allocate losses to shareholders and creditors, or revoke a license (except the MoE in specific cases provided in law), making the resolution process somewhat convoluted.

### Main Findings (overview of assessment scope and limits)
- Effectiveness assessment required review of legal framework and detailed examination of policies and practices of institutions responsible for banking regulation and supervision.
- In line with BCP methodology, the assessment focused on BdE as main supervisor and did not cover CCAA-specific legislation and supervisory practices.
- Because prudential regulation and supervisory processes of BdE are applied to the Caja segment, the assessment is also applicable to prudential supervision of Cajas conducted by BdE.
- The revised BCP methodology used for this assessment raises the bar on measuring supervisory effectiveness through emphasis on risk management practices and supervisory assessment of those practices.

*Source: IMF — FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE: SPAIN — REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSCS) — SUMMARY ASSESSMENTS, MAY 2012*

### 16.      Significant changes have occurred in Spain since the last FSAP. The most serious

### _cr12138 - 16.      Significant changes have occurred in Spain since the last FSAP. The most serious

### Overview: macro-financial shock and sectoral impact
- The most serious change since the last FSAP has been "the deterioration of the economy and the real estate sector leading to a major decline in land values and the financial condition of developers impacting loan quality."
- The crisis impacted the savings banks more severely due to "their high concentrations in loans to finance land development and construction and highlighted a serious weakness in their risk management," prompting "a complete restructuring of the sector and converting their vast majority into commercial banks."
- Commercial banks "fared better through the initial phase but are under increasing pressure as provisioning and capital requirements continue to increase."
- Regulatory context: "the period was framed by the implementation of Basel II."

### Supervisory process: strengths and areas of concern
- Strengths:
  - "The core supervisory process at the BdE is strong and is supported by qualified staff and an experienced cadre of inspectors."
  - Progress since the 2006 FSAP includes tightening "regulatory capital and loan-loss provisioning requirements for real estate exposures" and providing "further guidance on best practices for lending in this area."
  - Other implemented measures: reduced incentives for equity investments in nonfinancial companies by banks; reforms to strengthen corporate governance and capital-raising ability for savings banks; enhanced coordination between financial sector regulators; additional requirements on internal controls, investment, and verification of insurers' risk management; improved securities settlement systems functioning.
- Areas requiring attention:
  - "Closure of the supervisory work does not seem to be sufficiently timely or effective for bank resolution."
  - Specific weaknesses: "timeliness of remedial action, operational independence concerning issuance of regulations and enforcement, and oversight of concentration risk and related party transactions."

### Enforcement practice and timeliness of corrective action
- Observations from inspections:
  - Inspections revealed "the thoroughness of the supervisory process and the identification of key risks and their communication to bank management."
  - However, "the process for requiring corrective action is lengthy and corrective action tools were not timely applied."
- BdE actions and constraints:
  - BdE "identified at a very early stage the need for provisions and recommended corrective action, but the formal decisions were only adopted after following the deliberate BdE process and not fully employing all its available enforcement tools."
  - BdE "started to encourage mergers and did not close banks waiting for a market solution to achieve the lower cost option."
  - Enforcement tools were "not widely used (for example, implementing cease and desist orders to limit or eliminate dividends, putting in place strict review requirements before continuing to fund existing projects and severely curtailing new projects)."
  - Decisions considered "the information available at the time, the legal framework currently in force, the cost to the public purse, and the implications for financial stability."
  - BdE view: "since the troubled institutions had significantly curtailed lending to the troubled sectors; the level of bad assets would not increase."

### Legal and institutional framework: constraints on BdE authority
- Identified legal constraints:
  - "The BdE lacks authority to issue prudential regulations, except in areas specifically delegated by law or the Ministry of Economy."
  - Enforcement action is shared with the MoE: BdE "having to send to the Ministry the more grave issues for enforcement."
- Implications:
  - "Having the authority to issue prudential regulations would enable the BdE to address at an earlier stage developments of a systemic nature."
  - A "flexible enforcement regime enables the supervisor to quickly adjust a course of action" and "a more intense use of sanctions should work as deterrent to imprudent risk management."

### Concentration risk, related party transactions, and governance
- Key problems:
  - "The regulatory framework and oversight over concentration risk and related party transactions were not sufficient to address significant build-up of weaknesses in the system, some of them derived from the peculiar corporate governance structure for savings banks."
  - In Cajas, the issue "may have been aggravated by the division of responsibilities with the CCAA."
- Ongoing risk:
  - Although "the number of savings banks has been drastically reduced and their banking business transferred to commercial banks," "the shareholder and corporate structure of the new banks is complex and the BdE will need to apply particular attention to make sure deficiencies in the previously existing structures do not contaminate the banking organizations."

### Prudential regulation, provisioning, and AML/CFT
- Pillar 2 and ICAAP:
  - "Pillar 2 implementation has been a significant focus for the BdE."
  - A standard format for banks' Internal Capital Adequacy Assessment Program (ICAAP) was designed; "reporting was initiated in 2008" and "BdE staff meets with the banks annually to discuss the report."
- Concentration and related party lending:
  - "Concentration risk and related party lending played a significant role in recent cases of distressed financial institutions, in particular Cajas de Ahorros."
  - Related party lending contributed to lower quality credit via exposures "to non-consolidated real estate enterprises" and exposures "to public entities or organizations linked to members of governance bodies of the Cajas."
  - Enhanced Pillar II framework and seguimiento continuado monitoring are recent and "not yet fully applied to all institutions in the system."
- Loan loss provisioning:
  - "Loan loss provisioning has been robust but had to be supplemented in February 2012 due to the continued economic decline."
  - Existing provisions from the dynamic provisioning framework initially enabled banks to meet increased specific provisions, but "the continued crisis has prompted additional provisioning."
  - A Royal Decree Law "was issued imposing extraordinary provisioning levels on substandard and doubtful loans secured by land of by real estate developments."
- AML/CFT:
  - "A new law on anti-money laundering and combating terrorism (AML/CFT) was adopted in 2010."
  - Enforcement and monitoring responsibility rests with SEPBLAC; BdE "also plays an important role" through compliance inspections and "BdE and SEPBLAC collaborate closely and perform joint inspections when warranted."

### Ongoing supervision, IT infrastructure, and consolidated supervision
- Supervisory model and tools:
  - "The BdE has a risk-based supervisory model supported by a strong technical staff and a well-developed information technology system."
  - Onsite and offsite staff are integrated; primary instruments are "the onsite inspection and permanent onsite presence at many of the banks (at the time of the assessment, there was permanent onsite presence at 16 of the banks)."
  - A risk-based matrix is developed for each bank including governance, concentration risk and operational risk, with risk direction noted as "stable, increasing or declining."
- Information systems:
  - "The informational technology infrastructure greatly enhances supervisory efficiency and risk monitoring."
  - Supervisory staff have access to extensive information and "an electronic file system where an audit trail is available of all the supervisory reports, activities and issues related to a bank, including all inputs by inspectors."
- Consolidated and cross-border supervision:
  - "The BdE has broad authority to conduct consolidated supervision" and can supervise "solo and consolidated basis, including all the offices or entities within the group, irrespective of their location or legal structure."
  - Consolidated supervision relies on parent bank reporting and coordination with domestic and foreign supervisors.
  - BdE "conducts supervisory colleges for its two largest banks and for a medium-sized bank and has signed Memoranda of Understanding (MoUs) with relevant supervisors."

### Core Principles (BCP) grouping and specific governance independence issues
- CP grouping used for simplification:
  - (i) objectives, independence, transparency, powers and cooperation (CP 1);
  - (ii) licensing and structure (CPs 2–5);
  - (iii) prudential regulations and requirements (CP 6–18);
  - (iv) methods of ongoing supervision (CP 19–22);
  - (v) accounting and disclosure (CP 23);
  - (vi) corrective and remedial powers of supervisors (CP 23);
  - (vii) consolidated and cross-border banking supervision (CP 24–25).
- Independence concerns:
  - Dual legal framework governing Cajas "poses the risk of potential conflicts in the exercise of supervisory and sanctioning authority."
  - "Some market participants have expressed concerns about BdE’s independence, particularly due to the apparent delays in implementation of corrective actions and sanction."
  - Legal framework: sanctioning proposals are made by BdE Governing Council "to the Minister of Economy, who has sanctioning power for very serious infractions and resolution capacity."
  - "The legal framework also establishes the MoE as the principal agency charged with issuing financial regulation," and "the presence of a government member in the governance structure of the BdE" combined with these legal arrangements "does not create an environment conducive to independence."
  - Consequence: "As prudential regulation in Spain depends on governmental action, changes in the regulatory framework tend to follow the political cycle and may result in delays in the issuance of critical regulations."

*Source: _cr12138 - 16.      Significant changes have occurred in Spain since the last FSAP. The most serious*

### 1.2 Independence, accountability and

### 1.2 Independence, accountability and

### Independence, accountability and transparency
- Market participants expressed concerns about BdE’s independence due to apparent delays in implementation of corrective actions and sanction.
- Concern is triggered by market awareness of the thoroughness of BdE’s supervision—sanctioning proposals are made by the Governing Council of BdE to the Minister of Economy (MoE), who has sanctioning power for very serious infractions and resolution capacity.
- Assessors did not see evidence of government and industry interference in BdE’s supervision operations or supervision budget.
- Involvement of political bodies (CCAA s and the MoE) in licensing, sanctioning and resolution creates an environment for potential influence.
- Presence of the Secretary General of the Treasury on the Board of BdE, with voting capacity concerning:
  - issuance of prudential regulation,
  - nomination of senior supervisory staff,
  - allocation of supervisory budget (LABE Arts 20 and 21),
  - sanctions that fall under BdE (less serious and serious infractions),
  is noted as not conducive to independence.

### Legal framework (1.3)
- Supervisory authority cannot update prudential rules without changing laws.
- Law distinguishes BdE’s regulatory capacity in its monetary policy role from its supervisory role.
- Quoted 2006 FSAP concern: “there is a risk that the BdE may be unable to respond adequately should there be conflicting interests between the institutional goals of the BdE and the government, which could undermine BdE’s supervisory independence.”
- Changes in prudential framework follow the political cycle because prudential regulation is done through laws (approved by the legislative body) or the government.
- This may have allowed accumulation of problems and created regulatory uncertainty.

### Legal powers (1.4)
- Material deficiencies on powers to require prompt remedial action and impose sanctions.
- Supervisors can and do send recommendations and requirements to banks, but sanctioning powers are lacking.
- Previous FSAP recommended transferring sanctioning powers currently under the MoE to BdE.
- Authorities state there has never been a case where a sanction recommended by BdE failed to be imposed by MoE; however, the Secretary General of the Treasury is a voting member of the Governing Council on sanction proposals to be raised to the MoE, which diminishes the argument.
- According to the 2010 Supervision Report (Memoria de Supervision), from 2007 to 2010:
  - only one sanctioning procedure was initiated against banks,
  - and two against saving banks,
  although several institutions had serious deficiencies in management and solvency in the period.
- Lack of coercive powers undermines credibility and effectiveness of supervision.
- Also see CP 23—enforcement tools to protect bank capital and avoid asset dissipation were not widely used.

### Licensing criteria (3)
- Licensing authority is the MoE; reasons for denial of licenses based on BdE’s report are clearly stated in Law.
- No provision prevents MoE from providing a license contrary to BdE’s opinion—no certainty MoE's assessment of fit and proper, adequacy of controls, and organizational structure will coincide with BdE.
- Authorities report this has never occurred in practice; level of prescriptiveness in legislation makes this result unlikely.
- Assessors reviewed complete cases and found due diligence taken by authorities.
- In reorganization of the Caja sector, suitability of shareholders and senior management has been assumed where shareholders were authorized entities under CCAA suitability criteria.

### Transfer of significant ownership (4)
- 122 requests for transferring significant participation have been received in the past five years; all but one have been approved.
- Each application may involve one or more interested parties; some are internal reorganizations, creation of SPVs, segregation of financial activities of Cajas into Banks.
- Rejected application related to AML/FT restrictions and structural hindrance to consolidated supervision concerns.
- Access was given to one complete case and the database from supervisory returns.
- Ultimate ownership is defined, but the chain stops at shareholders which are listed and/or disperse shareholder ownership entities themselves.
- New commercial banks created from Cajas reform often have shareholder entities with no identifiable ownership and close links to local political environment given social services objectives—this may create detrimental influence over bank operations and soundness.

### Risk management process (7)
- LC grading in 2006 noted lack of ability to issue guidance on best practices and to require correction.
- Implementation of EU Directive 48/2006 on Pillar 2 has addressed the 2006 deficiency.
- Steps to implement Pillar 2 compliance and monitoring are well-defined.
- IAC report implemented is comprehensive and provides benchmarking guidance; designed to fit into supervision by risk and feed SABER and supervisory risk matrix.
- IAC implementation has been difficult for some institutions and continues to be adjusted since initiated in 2008; current version appears very workable.
- Wave of mergers and crisis management needs slowed ICA implementation and bank-by-bank evaluation; effective implementation of this CP in the system, particularly for new banks, cannot be fully assessed at this point.

### Problem assets, provisions, and reserves (9)
- BdE’s approach to provisioning is conservative; dynamic provisioning element provided additional cushion initially.
- As crisis prolonged, conservativeness of provisioning was not homogeneous, especially regarding valuation of real estate collateral.
- BdE established detailed loan classification and provisioning requirements; supervisory efforts focus on loan portfolio review, but system results required broader government action.
- Requirement for a one-off large catch-up provision for the system and large amounts of provisioning and capital support in the conglomeration of savings into commercial banks indicate provisioning did not lead to prompt adjustments during crisis.
- BdE is analyzing framework for valuation of real estate collateral to promote legal revision; its implementation should be important for full compliance with this CP.
- As dynamic/generic provisioning is expected to fade under new EU common regulatory framework, provisioning levels on an ongoing basis will need adjustment to ensure adequacy of credit loss estimation.

### Large exposure limits (10)
- BdE has extensive information on large exposures and concentration from quarterly reporting and Central de Información de Riesgos (CIR) database.
- Information feeds the System of Information on Borrowers (SIA), which analyses largest borrowers (individual and consolidated) and grades them for supervisory use.
- External auditors required to verify compliance with large exposures and concentration rules (long report).
- BdE strengthening monitoring and control of concentration risk; ICAAP includes concentration risk for additional Pillar 2 capital.
- Importance heightened by entrance of banks derived from consolidation of Cajas de Ahorros, which had high sectoral (real estate) and geographical concentration.
- Economic sector concentration was significant in recent distressed bank cases.
- Application of Pillar 2 and ICCAP process incorporating sector concentration is recent.
- Banks have two options to calculate additional capital for sector concentration risk:
  - simplified (ICS—indice de concentracion setorial),
  - internal methodology under Internal Ratings Based Approach (IRB).
- Given high sector and geographical concentration, assessors are not confident current framework (ICAAP + internal controls) is sufficient to cover concentration risk.

### Exposure to related parties (11)
- Definition appears broad enough to establish relationships indirectly through “interposed” persons.
- Not all requirements and guidance are based on the broad definition; many focus on “altos cargos” (senior management).
- BdE has information that supervision can verify on onsite inspections whether such exposures are treated no more favorably than regulation or market conditions allow.
- Framework does not seem to adequately cover conflicts of interest in related party lending.
- Complex organizational structures and remaining linkages between industrial companies and banks in Spain make related parties difficult to detect—this deserves additional attention.
- Related party lending was an important source of lower quality credit in the savings banks crisis, due to exposures to non-consolidated real estate enterprises and exposures to public entities or organizations linked to governance bodies of Cajas.

### Corrective and remedial powers of supervisors (23)
- BdE has a broad range of supervisory enforcement authority; the process has worked well and deliberate approach reduced need for sanctions.
- Adoption of new regulations to implement Pillar 2 has enhanced BdE’s preventive powers.
- Current crisis and rapid deterioration risk indicate need for flexible actions applicable at an earlier stage to effect corrective and preventive action.
- Need highlighted for prompt corrective action to resolve weak banks and conserve assets and capital.
- BdE should review enforcement procedures, including expediting process to take earlier actions, for example:
  - adding more weight to a written communication from the inspector at conclusion of inspection or supervisory activity at banks with ongoing supervision;
  - linking issuance of letters of requirement to risk-based benchmarks such as risk matrix measurements of trends and risk rating assigned to the bank.
- BCBS paper “Supervisory Guidance on Dealing with Weak Banks” provides options for preventive and corrective action tools.

### Recommended Actions (excerpted from Table 2)
- 1.1 Responsibilities and objectives
  - Change legal regime to clearly preserve sole and exclusive roles of BdE in prudential oversight of financial institutions, avoiding inconsistency in division of responsibilities.
- 1.2 Independence, accountability and transparency
  - Amend LABE to give BdE operational independence in its supervisory function in line with its independence as a Euro system central bank.
  - Make internal governance structures (selection, nomination and responsibility processes for supervision) clear and publicly available to assure and communicate independence of supervisory processes.
- 1.3 Legal framework
  - Introduce changes to transfer most regulatory powers currently under the MoE to enable BdE to promulgate prudential rules.
- 1.4 Legal powers
  - Introduce changes to transfer most sanctioning powers currently under the MoE to BdE.
  - Consider granting BdE licensing revocation authority in appropriate circumstances.
- 3. Licensing criteria
  - Ensure licensing criteria, in particular fit and proper requirements for senior management, are fully applied as restructuring continues.
- 4. Transfer of significant ownership
  - Ensure governance of new institutions fully complies with requirements of this CP as restructuring continues.
- 7. Risk management process
  - Ensure IAC (ICAAP) implementation continues and is fully integrated into BdE's matrix for the whole system.
- 9. Problem assets, provisions, and reserves
  - Ensure completion and implementation of reforms to collateral appraisal requirements.
  - As dynamic provisioning fades as a supervisory tool, review provisioning requirements to ensure adequacy of loss protection.
- 10. Large exposure limits
  - Improve tools and controls for supervision of economic sector concentration, in addition to ICAAP and internal controls.
  - Recommend BdE issue guidance/regulation specific to sector concentration (e.g., more detailed requirements in CBE 3/2008 Capitulo noveno and internal controls capital decimo).
  - Require banks to pursue adequate diversification and include stress test impacts in concentration management; improve reporting and disclosure of concentration by region and sector.
  - Supervisors should be able to require limits on a case-by-case basis and obtain monitorable plans for reduction where needed; strengthen SREP guidance regarding concentration risk.
- 11. Exposure to related parties
  - Ensure conflict of interest rules are enforced and related party lending monitored and control tools updated given new organizational structures from restructuring.
- 23. Corrective and remedial powers of supervisors
  - Review enforcement procedures to include:
    - implementation of earlier notification to the bank of areas for improvement (e.g., required written communication from inspector at conclusion of supervisory activity);
    - raise expectation of supervisory required action and enforcement based on risk-based benchmarks from risk matrix and capital levels;
    - adopt parallel actions to address individual unsound practices to protect assets and capital alongside linear escalation of supervisory pressure.

### Authorities’ response
- Spanish authorities (Spanish Treasury and Banco de España) expressed appreciation for the IMF assessment and strongly support the FSAP.
- Authorities share main views of assessment team and appreciate recommendations.
- Strength of Spanish regulatory and supervisory framework was stressed by the crisis; IMF recognizes determination and effort of Spanish authorities to address challenges.
- Some regulatory and supervisory practices commented have been improved in parallel to FSAP missions; financial reform accelerated and improvements are only partially reflected in final draft of assessment.
- A deep restructuring of savings banks is ongoing; professional management teams have been ensured and transparency improved.
- Spain is involved in international efforts to reinforce bank resolution regimes through FSB Key Attributes implementation and European Commission proposals on crisis management and bank resolution.
- Spanish response to the crisis is described as active, constant and multi-dimensioned, adapted to special features of the Spanish banking system.

*Source: IMF assessment chapter excerpt on independence, accountability and related supervisory matters.*

### 40.      The Spanish authorities look forward to continuing their dialogue with the IMF

### 40.      The Spanish authorities look forward to continuing their dialogue with the IMF

### Continued cooperation and authorities' stance
- The Spanish authorities look forward to continuing their dialogue with the IMF beyond the FSAP exercise.
- An important experience in the field of cooperation, transparency and best practices has been acquired and must now be appropriately cherished.
- Spanish authorities are aware of their role in the promotion of international financial stability and declare their willingness to continue working with international counterparts in order to grant it.

### Banco de España: factors explaining the speed of the banking restructuring process
- The Banco de España recognizes that the restructuring process has not been sufficiently timely and provides several factors to explain the pace and complexity:
  - First, adequate instruments for resolution were not introduced until 2009.
  - Second, only with hindsight is it clear that the deterioration in the economy was more protracted than initially anticipated by all national and international institutions.
  - Third, successive Spanish governments in power over the period decided and re-confirmed that only limited public funds should be used to rescue banks, thus discarding the ‘bad bank’-type alternatives. Other options were considered more appropriate, in part taking into account that the large Spanish banks were not affected, unlike large banks in other countries. This decision was taken not only due to the need to contain the public deficit, but also—and especially—due to the fact that a huge increase in the deficit could lead to an acute sovereign crisis, as has already happened in other countries. The decision to implement the restructuring through private solutions has many advantages but is inevitably slower and much more complex and cumbersome to implement than those that—however being more expeditious—involve huge amounts of public resources.
  - Fourth, implementation of a private solution was particularly difficult and slow because large international institutions that could have participated in mergers and acquisitions of Spanish institutions were not in a position to do so; hence the private solution was constrained to the domestic level.
  - Fifth, during this systemic crisis it was not possible to use the traditional resolution tool of winding-down a bank with write-downs for bondholders. If Spain had been the only country to impose losses on bond holders of medium-sized institutions, the funding for other healthy Spanish institutions would have been seriously impaired. Therefore, liquidation benefits would not have compensated the potential damage to the banking system as a whole and especially to healthier institutions.
  - Sixth, the governance of the Cajas added to the complexity of the restructuring process and affected its speed, due to the strong presence of political and trade union interests in their boards of directors and general meetings. This problem has been mitigated with the transformation of Cajas into banks, but will only disappear if the Cajas lose control over their participated banks.
  - Seventh, the fact that the Comunidades Autonomas exercised their power to approve the mergers of Cajas during the restructuring process significantly slowed down the process, given the need to hold long, complex and difficult negotiations with regional governments to reach adequate agreements. This problem has already disappeared thanks to the transformation of Cajas into banks.
- These factors explain why the whole restructuring process was slow and why, against this complex backdrop, the Banco de España had to conduct a large amount of work and was able to take actions only after following a very laborious and cumbersome process.

---

### II.  ASSESSMENT OF INSURANCE CORE PRINCIPLES

### A. Introduction and Scope
- The assessment provides an update on regulatory and supervisory developments in the Spanish insurance sector since 2006.
- Spain undertook an initial FSAP in 2006, which included a formal assessment of Spain’s observance with the ICPs issued by the IAIS in 2003. Spain also volunteered to undertake a country peer review under the Financial Stability Board (FSB) Framework for Strengthening Adherence to International Standards in 2010.
- The current assessment is benchmarked against the revised ICPs issued by the IAIS in October 2011. It takes into account laws, regulations and other supervisory requirements and practices in place at the time of the assessment, as well as market data provided by the authorities in the FSAP self-assessment questionnaire.
- Ongoing regulatory initiatives are noted, in particular pending legislative amendments to implement Solvency II.
- Spanish financial markets are supervised by three separate sectoral supervisors: banking by the BdE, securities by the CNMV and insurance by DGSFP.
- The Ministry of Economy and Competitiveness (MEC) is the agency empowered by the Private Insurance Organization and Supervision Law (TRLOSSP) to supervise insurance activities, except mutual insurers that operate solely within an CCAA where the CCAA has agreed to assume their supervision. By regulation, MEC has delegated the insurance supervisory responsibility to DGSFP, a department within MEC. DGSFP supervises only private insurance; social insurances are not subject to DGSFP supervision.
- The assessment was conducted by Dr. Rodolfo Wehrhahn, Technical assistance Advisor in the Financial Sector Oversight Division, Monetary and Capital Markets Department, IMF and Mimi Ho, insurance supervision advisor during February 1–21, 2012.

### B. Executive Summary — market structure, performance, and supervisory context
- Spanish insurance market is well developed, with a comprehensive range of products offered by domestic and foreign insurers.
- Life insurers accounted for about half of total gross premium written in 2010, and held approximately 80 percent of total industry assets.
- The majority of life products (including annuities) sold are guaranteed products.
- Main lines of non-life business are motor and property.
- The reinsurance market is relatively undeveloped in Spain for certain risks due to the Insurance Compensation Consortium (CCS), which provides coverage for extraordinary natural and social-political perils through a compulsory surcharge based on sum insured; thus little need exists for catastrophic reinsurance.
- Spanish insurers have weathered the financial crisis well:
  - Total written premiums increased in each of the past five years, except for a decline of 6 percent in 2010.
  - The industry has maintained combined ratios below 100 percent in the last three years.
  - The 2011 first nine months’ ROE is over 15 percent in non life and 13.5 in life.
  - Under Solvency I the industry show on average a sound solvency margin of around 200 percent above the required capital in the life sector and 350 percent in the nonlife sector.
- The insurance sector is supervised under a sound regulatory framework consistent with EU directives and international standards.
- Progress has been made on several recommendations from the 2006 FSAP; recommendations on strengthening the autonomy of financial supervisors have not yet been taken up.

### B. Executive Summary — main vulnerabilities (bulleted)
- Lack of sufficient resources to effectively carry out supervisory objectives:
  - State budget likely to remain stagnant if not shrinking in the near future; DGSFP’s share of the State budget is not likely to increase while demand for resources rises to implement new international prudential standards and supervise cross-border groups.
  - Effectiveness of supervision may be adversely affected given competing demands on limited resources.
- Concentration of guarantees in life business:
  - A third of the life insurance business carries guarantees backed by sovereign and corporate bonds.
  - While regulatory capital appears sufficient under Solvency I, adoption of Solvency II could result in additional capital requirements for some insurers; QIS 5 exercise showed a breadth of results requiring further calibration.
  - DGSFP has been working with European Commission Working Groups and EIOPA on the advanced design of Pillar 1 of Solvency II.
- Product disclosure weaknesses for life insurance:
  - UNESPA has issued voluntary guidelines on disclosure to customers.
  - DGSFP should be empowered to standardize and formalize disclosure requirements at point of sale and require ongoing disclosures to keep customers abreast of changes to policy values.
  - DGSFP’s cooperation with the Ministry of Justice in revamping the insurance contract law is a positive step.

### C. Main Findings — supervisory resources and structure
- Despite lack of independence in the regulatory structure, no evidence suggests DGSFP is not independent in carrying out its duties; however, budgetary dependency limits its ability to expand resources for expanded responsibilities, especially group-wide supervision.
- Competing demands on limited resources have resulted in a “fire-fighting” modus operandi; urgencies (Solvency II implementation, supervisory colleges) are managed at the expense of ongoing supervision.
- DGSFP is solely dependent on State budget and does not collect ongoing fees from market participants (only a one-time registration fee from intermediaries).
  - In 2011, it collected about EUR 700,000 of registration fees (turned over to the Treasury) compared to an operating budget of EUR 12.8 million.
  - DGSFP should explore other funding models to reduce reliance on State budget.
- With limited resources, DGSFP should review its scope of work and consider delegating less critical areas (e.g., complaint handling) to focus on offsite supervision and inspection.
  - DGSFP currently deploys 31 staff to handle a large number of complaints from the public.
  - An independent industry-wide ombudsman could be explored; brunt of cost borne by insurers, complainant to bear some cost to discourage frivolous complaints.
- Supervision is handicapped by lack of resources:
  - Six analysts are responsible for off-site monitoring of 280 insurers.
  - High dependency on system-generated ratios and quantitative information.
  - On-site inspection resources allow an inspection cycle of 4 to 5 years.

### C. Main Findings — market dynamics, risks, and industry metrics
- Life insurance guarantees and Solvency II preparedness:
  - A third of life business carries guarantees backed by sovereign and corporate bonds; Solvency II could increase capital requirements for some insurers.
  - DGSFP is engaged with European Commission Working Groups and EIOPA for Pillar 1 calibration.
- Consumer protection and disclosures:
  - Point-of-sale disclosure should include investment strategies; ongoing annual information on changes to policy values recommended.
- Governance, suitability, and internal controls:
  - Shortcomings expected to be addressed when Solvency II is implemented; DGSFP should work with industry on preparedness.
  - DGSFP should consider issuing a Code of Corporate Governance in line with the Unified Good Governance Code issued by the CNMV.
  - If Solvency II is further delayed, DGSFP should address deficiencies with high priority.
- Cross-border and group supervision cooperation:
  - DGSFP has signed MoUs with BdE, CNMV, the Swiss Federal Office of Private Insurance, and three South American insurance supervisors.
  - DGSFP participates in 23 supervisory colleges and is the group supervisor for two international groups.
- Market composition and product trends:
  - Insurance premium written relatively stable over the past three years; mature and saturated market with recent economic difficulties.
  - Annuity premium growth rate was 48 percent from 2008 to 2010.
  - Major non-life products: motor and property (about one-third each) and A&H (20 percent).
- CCS and reinsurance:
  - CCS provides protection on catastrophic risks funded by compulsory premium surcharges on every policy issued.
  - CCS has acted where private sector capacity was impaired (e.g., credit insurance during recent crisis) after special authorization by Parliament.
  - CCS provides capacity to multi-peril crop insurance via reinsurance arrangement with AGROSEGURO.
  - At end of 2011, CCS had a reserve fund of EUR 7.8 billion and a staff strength of 353.
- Industry size and asset composition:
  - Assets held by insurers as at end of 2010 totaled EUR 242.3 billion, or 22.8 percent of GDP.
  - The 27 composite insurers accounted for 53 percent of total industry assets.
  - Investment predominantly in fixed income instruments; holdings in sovereign debts are around a quarter of investment assets and around thirty percent in corporate debt.
  - Related party investments: total intra-group and related company receivables are around five percent of the investments supporting technical provisions; some insurers use deposits placed with parent banks to provide capital guarantee under unit-linked business, potentially increasing intra-group exposure.

*Source: _cr12138 - 40.      The Spanish authorities look forward to continuing their dialogue with the IMF*

### 63.      Despite the stagnation of premium income, insurers remain profitable. For the

### _cr12138 - 63.      Despite the stagnation of premium income, insurers remain profitable. For the

### Industry profitability and business composition
- Despite stagnation of premium income, insurers remain profitable.
- Non-life business: catastrophic risks are covered by the CCS resulting in high retention of premium.
- Life business: about 80 percent of life insurance (by new premium) is guaranteed return investment products with little mortality or longevity risks.
- Life insurers typically use asset/liability matching to manage interest rate risk; portfolios remain subject to credit risks.
- The industry has maintained combined ratios below 100 percent in the last three years.
- ICEA data showed that the industry profitability as measured by return on equities has further improved in the first nine months of 2011.

### CCS, AGROSEGURO, and functions
- CCS covers catastrophic perils including terrorism, rebellion, insurrection, riots and civil commotion, and actions of armed forces in peacetime.
- CCS mandatory cover scope includes:
  - (a) perils listed above;
  - (b) compulsory motor insurance for unaccepted or uninsured private vehicles and all official vehicles of government and public agencies;
  - (c) multi-peril crop insurance, working through AGROSEGURO.
- CCS may assume other insurance functions as required by public interest and market circumstances, subject to a 2/3 majority of board approval.
- Non-insurance functions include winding-up of insurers.
- AGROSEGURO manages the agricultural insurance system under a co-insurance arrangement with private insurers in which CCS takes up 10 percent.

### Summary of Observance of the Insurance Core Principles — key findings by ICP
- ICP 1 (Objectives, Powers and Responsibilities of the Supervisor)
  - Primary insurance legislation clearly defines objectives of insurance supervision and designates MEC as supervisor; DGSFP delegated day-to-day responsibility by decreto real.
  - Autonomous Communities license and supervise regional mutual insurers operating solely in their communities: in 2010 there were 159 such entities with gross written premium of EUR 1.6 billion (2.7 percent of Spanish insurance market).
  - DGSFP should monitor development of these entities.

- ICP 2 (Supervisor)
  - DGSFP is a department within MEC, funded by the State budget; not administratively independent but operates transparently.
  - DGSFP has full operational independence except in market access and administrative sanctions on very serious legal infringements where the Minister for MEC is approving authority.
  - DGSFP lacks additional resources for a more risk-focused supervisory approach; no staff retention policy or succession planning; headcount for core supervisory functions needs increase.
  - No policies to guide DGSFP staff in conflict of interest situations.

- ICP 3 (Information Exchange and Confidentiality Requirements)
  - Framework enables DGSFP to exchange confidential information with supervisors; for non-EU supervisors, collaboration contingent on reciprocity and confidentiality.

- ICP 4 (Licensing)
  - Legislation clearly defines licensing activities and process; inadequacies in assessment of (a) key individuals in control positions and (b) corporate framework during licensing.

- ICP 5 (Suitability of Persons)
  - Suitability test applied to “effective managers” (board members, senior management and significant owners).
  - Ongoing monitoring is indirect and relies on insurer reporting of appointments/removals; absence of reporting requirements creates risks.

- ICP 6 (Changes in Control and Portfolio Transfers)
  - Minister for MEC approves changes in control, portfolio transfer and legal structure changes; must consider policyholders’ interest and prudential considerations.
  - Acquisition of 10, 20, 30, or 50 percent or more of voting share or capital requires DGSFP’s specific indication of no-objection; notification threshold at 5percent ownership.

- ICP 7 (Corporate Governance)
  - Requirements limited to Board responsibility for internal control processes, independent internal audit and risk management systems; no comprehensive requirements on role and accountability of Board and Senior Management.

- ICP 8 (Risk Management and Internal Controls)
  - Mandatory reporting of internal control deficiencies introduced; guidance in inspection manual improved.
  - More specific details on scope of internal controls and reporting duties should be provided.

- ICP 9 (Supervisory Review and Reporting)
  - Off-site monitoring heavily dependent on system-generated ratios and warning flags; qualitative review relies on insurer disclosure.
  - Lack of integration of quantitative results with qualitative management indicators and absence of a risk-ranking based on impact/probability.
  - Current resources permit a 4- to 5-year inspection cycle, excluding 66 small insurers (ERD); off-site supervisors visit ERDs periodically for a day or two with a target to cover all ERDs over a two- to three-year period.
  - DGSFP conducted 18 on-site inspections in 2011 (two thirds full scale), compared to 48 in 2010, due to re-allocation of resources to Solvency II implementation.
  - Some key elements of insurance operations are reviewed only during on-site inspections.

- ICP 10 (Preventive and Corrective Measures)
  - DGSFP may require a financial recovery plan including a 3-year projection of: (a) estimates of management expenses, (b) detailed estimates of revenues and expenses relating to direct business, reinsurance acceptances and cessions, (c) the balance sheet, (d) estimates of financial resources intended to cover the liabilities and the solvency margin, and (e) the overall reinsurance policy.
  - DGSFP may require higher solvency margin or special audit.
  - Escalating measures include:
    - restriction of asset transfers,
    - short term financing,
    - injection of additional capital,
    - suspension of dividend payment to shareholders,
    - restriction to write new policies or to renew existing policies,
    - convening special board meetings,
    - temporarily replacing the board of directors, and
    - taking control of the insurer’s operation.
  - If special control measures fail, DGSFP may commence winding-up procedures.

- ICP 11 (Enforcement)
  - Spanish insurance law is prescriptive about sanctions; Article 38 grants broad power to take action when circumstances jeopardize insurer solvency or policyholders’ interest.

- ICP 12 (Winding-up and Exit from the Market)
  - Policyholders and beneficiaries have priority rights to assets covering insurers’ technical provisions in winding-up.
  - CCS is not a guarantee fund but manages winding-up and bankruptcy cases to ensure orderly exit and timely payments.
  - Out of 19 winding-up cases between 2007 and 2011, policyholders were paid 100 percent in all cases except two, where they were paid 52.4 percent and 84.1 percent, respectively.

- ICP 13 (Reinsurance and Other Forms of Risk Transfer)
  - Reinsurance regulation follows current EU Directives requiring adequate control and transparent reporting of risk transfer programmes.
  - Off-site reporting indicates level of risks reinsured; onsite inspection reviews sufficiency, completeness and timely execution of reinsurance contracts.
  - No formal requirement to finalize reinsurance contracts in a timely fashion, nor prohibition against reinsurance side letters.
  - Liquidity supervised through statutory reporting, but no requirement to consider payment pattern of reinsurance claims for liquidity management.

- ICP 14 (Valuation)
  - Current valuation follows Solvency I rules.
  - Assets and liabilities valued on consistent bases in the general regime and for immunized policies through the accounting mismatch reserve.
  - Business portfolios underwritten before 1999: assets valued at fair value and liabilities at historical value (not economic valuation).
  - For non-life business, most future cash flows are not discounted.
  - Revaluation of real estate is every three years.
  - Current method does not explicitly recognize best estimate of future cash flows or a specific margin for adverse experience fluctuation; some implicit conservatism exists through use of risk premiums instead of gross premium; some underestimation of future cash outflows for legacy business issued prior to 1999.
  - Pending adoption of Solvency II will address these discrepancies.

- ICP 15 (Investment)
  - Investment limits under current regulation do not hinder insurers’ ability to invest prudently and efficiently.

- ICP 16 (Enterprise Risk Management for Solvency Purposes)
  - Some insurers have adopted group ERM systems; no regulatory requirement to adhere to comprehensive ERM systems beyond general internal control requirements under Articles 110 and 110A of the Private Insurance Organization and Supervision Code (ROSSP).

- ICP 17 (Capital Adequacy)
  - Spain operates under Solvency I regime.
  - No enhancements toward a more risk-sensitive solvency regime while awaiting Solvency II, except detailed asset/liability matching requirements.
  - Shortcomings of current solvency regime hinder compliance with ICP 17 as a total balance sheet approach and risk-based capital assessment are not incorporated into legislation in force.

- ICP 18 (Intermediaries)
  - DGSFP registers insurance agents and brokers at legal entity and natural person levels, considering integrity, competence, and financial standing.
  - DGSFP has power to supervise and sanction intermediaries but resource limitations lead to supervision of exclusive agents being left to insurers; only 20 inspections of brokers and bancassurance operators in 2011.
  - Bancassurance distribution: 75 percent of individual life and 45 percent of group life business were sold through banks in 2010.
  - DGSFP maintains a register of intermediaries mixing natural persons and legal entities; sales staff of legal entity intermediaries are not individually registered.
  - Disclosure requirements exist for intermediaries but disclosure of remuneration is limited; brokers only disclose commission when paid both a fee by client and a commission by insurer.
  - Multi-tied agents and brokers required to carry professional liability insurance with coverage of up to EUR 1.68 million per year.

- ICP 19 (Conduct of Business)
  - Laws require disclosure at point of sale; for life insurance where policyholder bears investment risk, clear statement on market fluctuation and that historical results do not indicate future results.
  - Investment strategies and policies are not part of required disclosure.
  - Ongoing disclosures required for changes to policy terms and participation in profits; no requirement to inform policyholders of the value of their investment policies.
  - Life policies (except those where policyholder bears investment risk) may be cancelled within 30 days after receipt of policy document.
  - DGSFP handles a high volume of customer complaints.

- ICP 20 (Public Disclosure)
  - DGSFP publishes substantial financial information on insurers, bases for annual statements, distribution of benefits and profits, valuation methods and assumptions, sections of financial statements, technical information on life and non-life segments, coverage of technical provisions and solvency margin.
  - Disclosure requirements are comprehensive but data can be very out-dated by the time database is updated and are highly technical for the general public.

- ICP 21 (Countering Fraud in Insurance)
  - Insurance frauds are criminal offences under general criminal law.
  - DGSFP does not explicitly require insurers to have procedures to deter, detect, prevent and remedy frauds, nor does it monitor or analyze market vulnerabilities to frauds.
  - Counter-fraud measures are implemented voluntarily at industry level, limited by legal protection of client data.

- ICP 22 (Anti-Money Laundering and Combating the Financing of Terrorism)
  - DGSFP supports SEBLAC, the designated FIU, in collecting data during on-site inspections.
  - DGSFP understands ML/TF risks in insurance business and collaborates with other agencies in imposing sanctions on ML/TF offences.

- ICP 23 (Group-wide Supervision)
  - DGSFP’s supervision extends to all legal entities within an insurance group, including non-regulated entities and any entity DGSFP believes to be part of the group.
  - Insurance groups required to notify DGSFP of structural changes in a timely manner; DGSFP may deny or withdraw group licence if structure hinders effective supervision.
  - DGSFP adopts three levels of group-wide supervision framework in line with current EU Directives.

- ICP 24 (Macroprudential Surveillance and Insurance Supervision)
  - DGSFP collects and publishes a high volume of market statistics widely used by industry and academia.
  - DGSFP does not appear to use statistics for qualitative analysis beyond ratio generation.
  - Recommendation: develop a macroprudential surveillance system including mandatory industry-wide stress tests, and include sensitivity and scenario testing in the 3-year solvency projections to identify vulnerabilities at insurer and industry levels.
  - DGSFP should consider regional and global market development in macroprudential analysis.
  - DGSFP is developing a new analytical tool to build an early warning system and contributes to and receives information from other supervisors via EIOPA coordination.

*Source: _cr12138 - 63.      Despite the stagnation of premium income, insurers remain profitable. For the*

### 25. Supervisory The engagement at EU and international level with relevant supervisors is

### 25. Supervisory The engagement at EU and international level with relevant supervisors is

### Cooperation and Coordination (high-level findings)
- Supervisory cooperation and coordination at EU and international level is "high and collaborative."
- Supervisory colleges for the two international groups (where DGSFP is the designated group supervisor) have been established by the DGSFP and are under continuous improvement.
- DGSFP participates in another 21 Colleges as host supervisors.
- Due to international operations of some Spanish insurance (groups), the degree of cross-border cooperation is "highly intensive, and necessary."
- DGSFP is advised to allocate sufficient resources to the supervision of international groups to meet the growing requirements arising from its participation in 23 supervisory colleges.

### Cross-border Cooperation and Coordination on Crisis Management (findings and gaps)
- DGSFP follows EIOPA and IAIS protocols on cooperation and coordination in cross-border crisis management.
- Colleges have not tested crisis simulations beyond EU.
- There are no resolution plans among cross-border supervisors.
- Work on determining Systemically Important Financial Institutions (SIFIs) is in early stages.
- A relatively minor weakness: DGSFP does not require insurers to regularly test their contingency plans; it is advised that DGSFP should require it.

### Recommendations (ICP-aligned summary)
- Table 4. Spain—Recommendations to Improve Observance of ICPs (Recommendations are listed by Insurance Core Principle number)

1. Objectives, Powers and Responsibilities of the Supervisor
- DGSFP is advised to maintain updated information from the Autonomous Communities on the number and the size of the mutual insurers they license and supervise, consistent with its role as the national insurance supervisor.

2. Supervisor
- a. Enhance operational independence; the power to control market access (licensing and mergers and acquisitions) and administrative sanctions on very serious legal infringements should be delegated to DGSFP.
- b. Increase resources to keep pace with rapid industry developments. The ideal outcome is for DGSFP to gain financial and human resource policy independence so that it may explore alternative funding models. In the absence of financial independence, DGSFP needs to review its workload to focus on its core functions and delegate certain important but less critical functions to entities that may perform such duties more competently and efficiently. For example:
  - The handling of public complaints consumes 31 of DGSFP’s headcount. This function may be more competently carried out by an industry-wide independent ombudsman.
  - The implementation of Solvency II requires intense and highly technical attention. DGSFP could explore other avenues for resources, such as the CCS.
- c. Issue conflict of interest policies to complement the general Public Employees Code of Conduct.
- d. Update the Insurance Contract Law (LCS) without delay.

3. Information Exchange and Confidentiality Requirements
- Spain is not yet a signatory to the IAIS Multilateral Memorandum of Understanding (MMoU). It should reconsider its accession to the MMoU.

4. Licensing
- Expand the fitness and propriety assessment to include key individuals in control positions (see ICP 5), and (b) assess an applicant’s corporate governance framework (see ICP 7).

5. Suitability of Persons
- a. Amend the definition of “effective manager” to include key individuals in control positions, with an attendant definition of “control positions.” (See also ICP 8.)
- b. Improve the ongoing monitoring of the fitness and propriety of effective managers by requiring insurers to report any changes in circumstances affecting their fitness and propriety.

6. Changes in Control and Portfolio Transfers
- None

7. Corporate Governance
- DGSFP should establish a comprehensive Code of Corporate Governance for insurers domiciled in Spain, in line with the Unified Good Governance Code issued by the CNMV for listed companies. The Code should contain specific requirements on:
  - (a) the board structure, governance, and assessment of the effectiveness of the board;
  - (b) roles and accountability of board members, senior management and key personas in control functions;
  - (c) remuneration of board members and senior management;
  - (d) timely and reliable financial reporting to the public; and
  - (e) timely and effective communication with DGSFP and relevant stakeholders (including policyholders) on the governance structure of the insurer.

8. Risk Management and Internal Controls
- a. DGSFP is advised to strengthen the existing regulation in the following areas:
  - Scope of internal controls—To be effective, internal controls should be comprehensive, covering the insurer’s key business, IT and financial processes. Key control functions must minimally include internal audit, risk management and actuarial. Each key control function should (a) be led by a person suitable for the position, (b) have sufficient independence from business units and adequate resources, (c) have sufficient resources, and (d) have access to the board and provide regular reports to the board.
  - Duties of key control functions:
    - (a) Risk management should assess risks on an enterprise-wide basis. There should be defined risk appetite, documented approval process and authorities, established risk strategy, and escalation and reporting procedures.
    - (b) Internal audit should assess the adequacy and effectiveness of the insurer’s policies and procedures, and the documentation and controls of these. It should also evaluate the reliability and integrity of management information.
    - (c) Actuarial function is to advise on matters relating to technical provisions, pricing, investment policies, solvency position, reinsurance, recommendation of dividends to policyholders on participating policies, and risk modelling.
    - (d) Compliance function is to advise on compliance with laws, regulations and internal policies and procedures. Compliance procedures should be integrated in work processes.
- b. Outsourcing: Expand existing regulation on outsourcing to require: (i) board approval of outsourcing of material functions or activities, (ii) due care and diligence in selecting the outsourcing providers, (iii) written documentation of the outsourcing arrangements, and (iv) periodic review of such arrangements.

9. Supervisory Review and Reporting
- DGSFP is advised to review the adequacy of resources for both on- and off-site supervision, and formulate a more robust risk-based supervision approach.

10. Preventive and Corrective Measures
- See ICP 17.

11. Enforcement
- None.

12. Winding-up and Exit from the Market
- None.

13. Reinsurance and Other Forms of Risk Transfer
- DGSFP should require insurers to:
  - a) finalize the reinsurance contract in a timely fashion, and prohibit the use of reinsurance side letters.
  - b) consider the payment pattern of reinsurance claims for the purpose of liquidity management.

14. Valuation
- DGSFP should address a number of deficiencies in the current Solvency I methodology. For instance by implementation of the Solvency II regime.
- Specifically, the valuation of liabilities should explicitly recognize best estimate of future cash flows, and a specific margin for adverse experience fluctuation.
- Real estate should be re-valued every year.

15. Investment
- None.

16. Enterprise Risk Management for Solvency Purposes
- There is an urgent need to develop a comprehensive enterprise risk management regulatory framework.

17. Capital Adequacy
- Pending Solvency II adoption, the DGSFP is advised to introduce regular scenario testing to determine the impact on insurer’s solvency position.
- DGSFP should also formalize its practice of commencing discussions with an insurer at risk of breaching its solvency margin so that there is sufficient time to take preventive measures.

18. Intermediaries
- DGSFP is advised to:
  - Improve the register of intermediaries to include all persons allowed to sell, for greater public disclosure and protection.
  - Require intermediaries to disclose their financial interest in the sale of the products. For instance, an intermediary should point out which of the policies presented to the client bears the higher commission. Also the commission should be disclosed at least upon request.
  - Require intermediaries to put in place additional safeguards to protect client’s money. For example, the use of bank accounts separate from the intermediaries’ own accounts to hold client’s money.
  - Increase frequency of on-site inspections.

19. Conduct of Business
- a. DGSFP is advised to improve the disclosure requirements to include:
  - At the point of sale: description of investment strategies used to provide policy guarantee, so that the customers may form an informed conclusion on the security of the guarantee.
  - Intermediaries selling products invested in complex investment instruments (e.g., derivatives, structured products) should have special training so that they can explain the risk, costs and benefits of the investments to customers clearly.
  - On an ongoing basis: statements to customers of life insurance with investment elements at least annually, to inform them of the changes in policy values during the year.
- b. DGSFP is advised to consider setting up an industry-wide independent ombudsman to handle public complaints.
- c. Banks often offer packaged products for compulsory insurance. In such cases, the bank assurance operator should inform the customers that he is free to choose the product from another insurer. Furthermore, the cost for each component of the packaged product should be clearly identified.
- TRLOSSP should give DGSFP the proper power to improve public disclosure.

20. Public Disclosure
- DGSFP is advised to (a) improve the timeliness of public disclosure by using quarterly information submitted by insurers, and (b) require insurers to disclose their risk management and internal controls in a manner that can be understood by the public. (See also ICP 7 on corporate governance.)
- TRLOSSP empower DGSFP to improve public disclosure.

21. Countering Fraud in Insurance
- Regulation should explicitly require insurers and intermediaries to have effective policies and procedures to deter, prevent, detect, report and remedy fraud as part of their internal control processes.

22. Anti-Money Laundering and Combating the Financing of Terrorism
- DGSFP should consider, in supporting Servicio Ejecutivo de la Comisión de Prevención del Blanqueo de Capitales (SEPBLAC) to further facilitate the industry’s compliance with AML/CFT law, issuing guidelines on risk-based customer due diligence (CDD) procedures.

23. Group-wide Supervision
- DGSFP is advised to consider the following improvements to its group-wide supervision framework:
  - a. Given the large number of insurance groups in Spain, review its capacity (under level 1) to carry out effective group-wide supervision.
  - b. In light of the recent financial crisis, consider improving the level 3 reporting requirements to include off-balance exposures, liquidity risks and possible contagion and reputation risks.

24. Macroprudential Surveillance and Insurance Supervision
- DGSFP is advised to:
  - a. Provide context to the comprehensive market statistics it publishes, by including more macroeconomic factors, such as level of interest rates, financial market indices, inflation, inter-connectedness with other financial market participants, catastrophes and pandemics that may impact insurers and insurance markets.
  - b. Develop a macroprudential surveillance system, including mandatory industry-wide stress tests to identify trends, potential risks and plausible future unfavourable scenarios, so that it may take early action to reduce the likelihood of systemic risk. DGSFP should include sensitivity and scenario testing to identify vulnerabilities at the insurer level and at the industry level as well as to assess the potential systemic importance of insurers.
  - c. Consider regional and global market development in its macroprudential analysis, recognizing the international dimension of its insurance market.

25. Supervisory Cooperation and Coordination
- (See Cooperation and Coordination above.) DGSFP is advised to allocate sufficient resources to the supervision of international groups to meet the growing requirements arising from its participation in 23 supervisory colleges.

26. Cross-border Cooperation and Coordination on Crisis Management (recommended actions)
- As part of its involvement in supervisory colleges, DGSFP should work with other group/involved supervisors to:
  - test the crisis simulations beyond EU;
  - establish resolution plans among cross-border supervisors;
  - identify SIFIs;
  - institute action plans in respect of SIFIs in case of a crisis; and
  - require insurers to regularly test their contingency plans.

### Authorities’ Response (summary paragraphs)
- Paragraph 64: The Spanish authorities express gratitude for the IMF assessment; FSAP is "extremely useful" as a benchmark.
- Paragraph 65: Assessment concludes the sector is supervised under a sound regulatory framework; Spanish authorities have an ambitious agenda to introduce new regulation and tools.
- Paragraph 66: Main vulnerability identified is lack of sufficient resources; Spanish authorities will take measures to address this weakness. The Spanish insurance industry has repeatedly expressed willingness to financially support the supervisor.
- Paragraph 67: Strengthening the autonomy of the supervisor is a pending issue; will be addressed when the economic crisis allows.
- Paragraph 68: Steps already taken to address shortcomings; ongoing transposition of Solvency II will tackle concerns regarding product disclosure for life insurance and capital requirements linked to insurer risk.

*Source: _cr12138 - 25. Supervisory The engagement at EU and international level with relevant supervisors is*

### 75.      The assessors relied on: (i) a self-assessment prepared by the CNMV; (ii) the review

### _cr12138 - 75.      The assessors relied on: (i) a self-assessment prepared by the CNMV; (ii) the review

### Assessment process and acknowledgements
- The assessors relied on:
  - (i) a self-assessment prepared by the CNMV;
  - (ii) the review of relevant laws and reports;
  - (iii) review of supervisory files;
  - (iii) meetings with staff from the CNMV, the BdE; the ICAC; the MEC; and prosecutorial authorities;
  - (iv) meetings with market participants, including issuers, securities firms, fund managers, exchanges, external auditors, credit rating agencies and law firms.
- The assessors thank the CNMV for its full cooperation and candid engagement, and extend appreciation to other public authorities and market participants met.

### Institutional structure
- The CNMV is responsible for regulation and supervision of securities and derivatives markets in Spain, including:
  - primary securities markets (issuance);
  - secondary markets (for both securities and derivatives);
  - disclosure obligations of issuers;
  - provision of investment services by market intermediaries;
  - collective investment schemes (mutual funds and investment companies).
- Authorization of intermediaries (except financial advisors) and market infrastructure providers (exchanges and central clearing counterparties) is a responsibility of the MEC, based on a recommendation of the CNMV.
- Regulations can only be issued by the Government or the MEC; the CNMV can issue binding rules (Circulares) only where expressly permitted by the relevant Royal Decree or MEC order.
- Governance and operational features of the CNMV:
  - The CNMV is a public law entity with legal personality.
  - Governed by a board (the Consejo) composed of seven members: a President and a Vice President appointed by the government on a recommendation of the MEC, three members with experience in securities markets, and two ex-officio members (the Secretary General of the Treasury and Financial Policy and the Deputy Governor of the BdE).
  - The board delegates day-to-day functions to an Executive Committee (all but the ex-officio members).
  - Board-level decisions include approval of Circulares, imposition of sanctions, and approval of the annual report and annual plan of activities.
  - Although self-funded, the CNMV requires government approval to hire additional staff.
- Self-regulatory organizations: there are no self-regulatory organizations in Spain.
  - The four exchanges operated by Bolsas y Mercados Espanoles (BME) act as front-line supervisors to ensure orderly trading, with a complementary role to the CNMV regarding market abuse.
  - Exchanges do not supervise securities intermediaries beyond market rule compliance, nor monitor issuer disclosure compliance (except in the case of MTFs where BME has a more direct role).
  - Latibex and Mercado Alternativo Bursátil (MAB) are MTFs where the MTF operator (BME) monitors market abuse and issuer disclosure, but these markets are not of material importance at present.

### Market structure and key statistics
- At 30 September 2011:
  - Spanish savings and investments totalled approximately 1,758 billion Euros.
  - 57 percent are held in deposits with credit institutions.
  - 26 percent are held in mutual funds or direct market investments.
- Issuers:
  - At December 2011, 130 companies were listed on the main (electronic) Spanish equities market operated by the BME Group.
  - In addition, there were 7 issuers on the second market and 28 issuers listed on the small cap open outcry market.
  - Total market capitalisation was € 421 billion (or approximately 39 of Spain’s GDP).
  - Stocks in financial companies account for almost 31 percent of total market capitalization, with banks accounting for over 90 percent of this figure.
  - The top ten companies represent over 60 percent of total market capitalization.
  - There were six new listings in 2011 (and five de-listings).
  - Additional listings: BME MAB market (18 companies), and regional exchanges.
- Fixed interest market:
  - At December 2011 there were 611 issuers of fixed interest products and a total of 4,382 issues available for trading on the BME’s fixed interest market, Asociación de Intermediarios de Activos Financieros (AIAF).
  - Total outstanding on these issues was € 882.4 billion.
- Intermediaries (as of December 2011):
  - 94 investment firms (49 broker dealers and 45 brokers) and 187 banks and other credit institutions were authorized to carry out investment services in Spain.
  - 2,377 European firms have notified the CNMV of their intention to provide investment services in Spain; of these 36 operate through branches and the remainder through the free provision of services (passport) arrangements.
  - Six authorized portfolio management firms and 82 authorized financial advisors (60 firms and 22 individuals).
  - Banks account for 72 percent of commissions earned from investment services activities.
  - Banks account for over 96 percent of placement and underwriting activity, 95 percent of administration and custody, and 92 percent of mutual fund marketing.
- Collective Investment Schemes (CIS) (at December/November 2011):
  - 5,460 CIS vehicles registered with the CNMV, comprising 2,341 investment funds, 3,056 investment companies (SICAVs), 36 hedge funds, and 27 fund of hedge funds.
  - 14 real estate funds (6 investment funds and 8 SICAVs).
  - Almost 5 million investors in CIS in Spain.
  - Total assets under management at November 2011 were € 156 billion, with € 132.4 in investment funds and € 23.6 in SICAVs.
  - Banks and other credit institutions manage more than 90 percent of the total assets under management.
  - Asset allocation: over 60 percent of fund assets in fixed income or guaranteed fixed income funds; 4 percent in mixed fixed interest funds; guaranteed equity funds account for almost 14 percent of total funds under management.
  - Investment in real estate funds was € 4.8 billion, or about 3 percent of all funds under management.
- Markets and market infrastructure:
  - The BME Group operates all regulated markets in Spain except for an olive oil futures market and the Spanish Public Debt Market; BME equity markets use the same electronic trading platform and are order driven.
  - Market makers are used by Latibex and MAB to provide liquidity.
  - BME operates a centralised securities depository, IBERCLEAR, and a Central Clearing Counterparty (CCP) for repos on Spanish public debt transactions, MEFFCLEAR.
  - Non-BME trading in BME-listed products is estimated at less than 2 percent.
  - A specialized olive oil futures market exists with small and declining trading volumes.
  - Table data highlights (as presented):
    - BME [comprising the stock exchanges of Barcelona, Bilbao, Madrid and Valencia] — Official secondary market — 130 listed entities — Market capitalization: € 492 billion [November 2011].
    - MAB MTF — 18 listed entities [3,056 SICAVs] — Market capitalization: € 444 million (small cap stocks) [December 2011].
    - Latibex MTF — 34 listed entities.
    - AIAF — Official secondary market — 608 debt issuers — Total outstandings: € 868 billion [November 2011].
    - SENAF — MTF — Public debt.
    - MEFF Equities — Official secondary market — Equity derivatives.
    - MEFF Fixed Income — Official secondary market — Fixed income derivatives — No activity in 2012.
  - The Official Secondary Market for Book-Entry Public Debt is run by the Bank of Spain, which supervises and oversees it.

### Preconditions for effective securities regulation
- Preconditions appear to be in place:
  - Foreign issuers can tap the markets under similar conditions to domestic issuers.
  - The same authorization requirements apply to domestic and foreign corporations that want to provide investment services, including CIS management, or to operate a regulated market (RM) or an MTF in Spain.
  - Operational barriers have prevented establishment of multilateral trading facilities outside those managed by the BME.
  - Company law is modern; the insolvency framework includes restructuring procedures.
  - The judiciary system is perceived as impartial.
  - Accounting and auditing standards do not have major differences with international standards.

### Main findings
- Principles for the regulator:
  - The CNMV has a clear mandate embedded in the LMV.
  - The organizational structure does not guarantee the CNMV full independence.
  - Authorization requirements for regulated activities are clear and accessible via CNMV’s website.
  - The CNMV has developed manuals to support consistent decision making.
  - Development of regulations by both the CNMV and the MEC is subject to public consultation.
  - CNMV staff are subject to robust rules on conflicts of interest, including a detailed framework for securities transactions.
  - The CNMV has established processes to identify and monitor systemic risk, perimeter of regulation and conflict of interest.
- Principles for enforcement:
  - The CNMV has broad powers to request information and inspect regulated entities, and to request information and testimony from third parties.
  - The CNMV has a wide set of enforcement tools, including imposition of money penalties for breaches to the LMV and secondary legislation.
  - Until recently the majority of enforcement cases concerned issuers’ violations.
  - In the last three years the CNMV has been more active in investigating compliance by investment firms and credit institutions that provide investment services with their conduct obligations.
- Principles for issuers:
  - Issuers of public offerings and products admitted to trading on an RM are subject to robust disclosure obligations at registration, periodically, and on an on-going basis.
  - The CNMV has developed a robust program to monitor issuers’ compliance with their disclosure obligations.
  - Basic rights of shareholders are embedded in company law; additional protections for issuers listed in an RM include the obligation to launch a mandatory tender offer under certain conditions.
  - Notification obligations exist for substantial and insider holdings.
  - Different provisions apply to MAB and Latibex; these markets are not material at this time.
- Principles for auditors, CRAs and information service providers:
  - The ICAC is implementing a system of quality control review for auditors of public interest entities (PIEs), including firms that audit issuers listed in an RM, with inspections by ICAC on a three year cycle.
  - CRAs providing services in Spain have been subject to a thorough registration process by cross-European colleges of supervisors.
  - ESMA is developing its supervisory program for CRAs.
  - There is a framework for sell-side analysts to address potential conflicts of interest based on disclosure obligations; additional disclosure obligations have been imposed on other entities that provide evaluative services.
- Principles for collective investment schemes:
  - CIS operators and distributors of CIS are subject to authorization requirements including financial, fit and proper, and organizational requirements; the review process is thorough.
  - Supervisory program for CIS relies on off-site monitoring and thematic reviews; on-site inspections are conducted on a limited number of operators selected under a risk-based approach.
  - CIS offered to the public are subject to similar disclosure obligations as an issuer.
  - Assets must be entrusted to a depository (custodian); depositories can be of the same group but legal and regulatory arrangements provide additional safeguards.
  - Special reports are required from the compliance unit of the CIS and from external auditors.
  - Assets must be valued at fair value; the CNMV has developed guidance on valuation of illiquid assets.
  - Conditions of suspensions of redemptions must be disclosed in offering documents; suspensions must be notified to the CNMV.
- Principles for securities intermediaries:
  - Investment Services Providers (ISPs) are subject to authorization requirements including financial resources, fit and proper, and organizational requirements; the review process is thorough.
  - Supervisory program for ISPs relies on off-site monitoring and thematic/horizontal reviews; on-site inspections are conducted on a limited number of operators selected under a risk-based approach.
  - Minimum and ongoing capital requirements apply to ISPs.
  - ISPs must submit monthly and quarterly reporting of their capital adequacy as well as annual audited financial statements.
  - The CNMV uses an estimate of five month losses as an early warning indicator that triggers more intense monitoring.
  - The CNMV has developed manuals to facilitate the process of dealing with the failure of an ISP.

*Source: IMF staff assessment content as provided in the supplied PDF excerpt.*

### 99.      Principles for secondary markets: RMs and MTFs operators are subject to

### 99.      Principles for secondary markets: RMs and MTFs operators are subject to

### Summary findings: regulatory mandate, powers and supervision
- RMs and MTFs are subject to authorization requirements, which include financial, fit and proper, and organizational requirements. IT incidents must be reported immediately.
- The CNMV has a clear mandate stemming from the LMV and has established formal and informal cooperation arrangements with the BdE and the DGSP.
- The legal framework does not provide the CNMV with full independence: the Ministry of Essential Criteria (MEC) is part of CNMV’s board, certain key decisions remain MEC responsibilities, and CNMV requires governmental approval to hire additional resources.
- The CNMV has adequate powers, though authorization of ISPs and RMs is still a responsibility of the MEC.
- Level of CNMV resources has increased in recent years but is described as “not yet at optimal level.”
- The CNMV has comprehensive powers to request information and conduct inspections on regulated entities, and broad enforcement powers including imposing money penalties for LMV breaches and secondary legislation.
- The CNMV is empowered by the LMV to share information with domestic and foreign regulators and is a signatory of the IOSCO MMoU; under the IOSCO MMoU no request for assistance has been refused.
- The CNMV is the front line supervisor for detecting market abuse and has developed an automated system of alerts and arrangements to oversee BME and MFAO.
- The CNMV makes limited use of on-site inspections and should intensify on-site work, notably regarding banks due to their dominant role in the Spanish securities market.
- The CNMV has been active in investigating market abuse; sanctions mainly in connection with insider trading, cases on market manipulation are in the pipeline, and referrals to criminal prosecutors have increased though there has been only one conviction.
- The CNMV has implemented a robust program to monitor issuer compliance with disclosure obligations; issuers on an RM must submit a prospectus and consolidated statements according to IFRS.
- For Latibex, disclosure requirements of the home country apply; BME must verify whether they provide equivalent protection; size of these venues is not material.
- CIS operators, ISPs, HF operators, and other market participants are subject to authorization requirements including financial, fit and proper and organizational criteria; authorization processes are described as thorough.
- MEFF and MFAO monitor clearing members’ positions daily; MEFF has set position limits for members’ clients and both MEFF and MFAO can request additional collateral from members. There are clear default procedures available to members.
- Naked short selling is prohibited. Notification of failed settlements to the CNMV is required. Iberclear is empowered to order replacement purchases in the market at the expense of the seller.
- Pre- and post-trade transparency requirements apply to all markets managed by the BME and MFAO. The Spanish market has not faced challenges related to market fragmentation compared to other European markets.
- Not assessed: Principle 38 — Securities settlement systems and central counterparties.

### Findings organized by selected IOSCO Principles (highlights)
- Principle 1: CNMV mandate clear under LMV; material differences in regulation of like products (unit-linked insurance products vs securities products).
- Principle 2: Legal framework lacks full CNMV independence; mechanisms of accountability exist (annual report, review of accounts).
- Principle 3: CNMV has adequate powers; authorization of ISPs and RMs remains MEC responsibility.
- Principle 4: Public consultation process for circulares; authorization requirements and manuals available; enforcement sanctions disclosed once final except minor infractions.
- Principle 5: Staff duties include loyalty, fairness and confidentiality; detailed guidance on personal securities transactions; Internal Control Department monitors compliance; cooling off periods exist.
- Principle 6: CNMV contributes to systemic risk monitoring via Grupo Interno de Estabilidad Financiera and CESFI.
- Principle 7: Front-line supervisors identify perimeter gaps; biweekly management meetings support bottom-up approach; annual top-down priorities.
- Principle 8: Regulated entities required to implement internal controls and risk management for conflicts of interest; retention requirements in securitization.
- Principle 9: No SROs in Spain.
- Principle 10–11: Comprehensive inspection, investigation and surveillance powers; broad enforcement tools including information and testimony requests from third parties.
- Principle 12: Limited use of on-site inspections; CNMV active on market abuse investigations; few convictions to date.
- Principle 13–15: CNMV empowered to share information and regularly collects information on behalf of foreign regulators.
- Principle 16: Robust periodic and ongoing disclosure for issuers on RMs; CNMV monitors disclosures by issuers; MAB disclosure broadly in line with IOSCO.
- Principle 17: Company Act provides shareholder framework; additional protections for RM issuers (mandatory tender offer under conditions); different thresholds for MAB and no tender offer obligation there.
- Principle 18: RM issuers must submit consolidated statements according to IFRS; others may use Spanish GAAP, EEA national standards, or U.S. GAAP.
- Principle 19–21: ICAC implementing oversight for PIE auditors with direct inspections on a three year cycle; auditors subject to independence provisions and local audit standards homologated by ICAC.
- Principle 22: All CRAs providing services in Spain underwent registration via colleges of European regulators; ESMA conducted on-site inspections and released general findings.
- Principle 23: LMV and secondary legislation set framework for sell-side analysts and other evaluative service providers; disclosure of conflicts required.
- Principles 24–31: CIS, HFs, ISPs subject to authorization and ongoing requirements; CIS assets entrusted to a depository; ISPs subject to capital adequacy reporting (monthly and quarterly), annual audited financial statements, internal controls, and suitability obligations.
- Principle 32: CNMV uses a calculation of estimated losses over a period of five months as an early warning mechanism; investor compensation scheme in place; resolution governed by general corporate regime; CNMV developed a manual for ISP failure handling.
- Principle 33–35: Trading systems subject to authorization and oversight; CNMV oversees BME and MFAO; transparency rules apply to equity, debt and derivatives.
- Principle 36: Insider trading and market manipulation are administrative and criminal offenses; CNMV active in investigations, more referrals to criminal authorities but only one conviction.
- Principle 37: MEFF monitors clearing members’ positions daily; position limits and collateral powers exist; failed settlements reporting required.
- Principle 38: Not assessed.

### Recommended action plan (selected recommendations from Table 8)
- Principle 1:
  - Seek legal reform to ensure consistent regulation between unit-linked insurance products and securities.
  - In the short term, CNMV should consider forming a working group with the DGSFP to coordinate regulation and supervision of lookalike products.
- Principle 2:
  - Strengthen CNMV independence by: (i) providing authority to grant and revoke authorizations and impose sanctions for the most serious violations; (ii) providing stronger financial autonomy given its self funded status; and (iii) considering removal of MEC representation on its board.
- Principle 3:
  - Pursue legal reform to provide CNMV with broader rulemaking powers.
  - Explore mechanisms to ensure CNMV can acquire and retain needed expertise, including salaries comparable with the financial sector.
- Principle 4:
  - Consider making public the comments received during consultation on circulars.
- Principle 6:
  - Broader integration of top-down analysis with bottom-up findings is encouraged.
- Principle 7:
  - Consider more systematic review of the perimeter of regulation.
- Principle 8:
  - Continue active monitoring of conflicts of interest arising from dominance of banks in securities markets.
- Principle 11:
  - Consider legal reform to provide CNMV power to access telephone and internet service providers’ data.
- Principle 12:
  - Review and expand coverage of the inspection program.
  - Seek legal reform to introduce a more streamlined procedure for “objective” breaches of the law, such as late filing.
- Principle 16:
  - Continue active monitoring of disclosure by banks when issuing financial products to retail investors.
- Principle 17:
  - Continue to monitor growth of MAB to determine whether further enhancements to investors’ rights are required.
- Principle 19:
  - ICAC should continue implementation of the new PIE oversight approach, including hiring additional expert staff as envisioned.
- Principle 24:
  - Keep under review the balance between off-site, thematic and on-site inspections; consider on-site inspections of newly authorized firms.
- Principle 29:
  - Consider extending competence requirements to all directors, as with integrity requirements.
- Principle 31:
  - Review inspection program coverage for credit institutions and investment firms; consider incorporating investment advisors more systematically into the on-site program.
- Principle 32:
  - Consider implementing an early warning system more directly connected to the solvency requirement.
- Principle 36:
  - Complete implementation of the cross-market surveillance system as planned.

*Source: IMF staff assessment in chapter on IOSCO Principles implementation for Spain.*

### 100.     The Spanish Authorities broadly agree with the IOSCO Principles assessment and

### _cr12138 - 100.     The Spanish Authorities broadly agree with the IOSCO Principles assessment and

### Overall position and appraisal
- The Spanish Authorities "broadly agree with the IOSCO Principles assessment".
- They "praise the IMF FSAP team for the excellent work done".
- They consider the FSAP "an extremely useful instrument for markets and regulators" because it:
  - provides a transparent picture of how the financial sector does work, and
  - encourages ways to ameliorate its functioning.

### Principle 2 — Regulator independence and presence of the Ministry on the CNMV Board
- The authorities "do not fully share the IMF’s views on the presence of the Ministry in the Board of the CNMV (Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers)".
- Key points made by the authorities:
  - "The distribution of regulatory competences between the Ministry and the CNMV cannot be interpreted as breaches against the independence principle."
  - The Ministry's presence on the Board is "of just one vote" and:
    - "provides the best possible channel of communication between the CNMV and the Ministry",
    - "enriches the Board’s debates bringing points of view of all regulatory bodies" (the Bank of Spain is also a member of the CNMV Board).
  - "Day-to-day technical matters are not referred to the Board and therefore the Ministry, as a member of the Board, cannot cast a vote."
  - "Legislation is clear about the scope of regulatory measures that the CNMV and the Ministry have to take."

### Principle 3 — Rulemaking powers, responsiveness, and checks and balances
- IMF observation: the current framework "whereby the CNMV only has rulemaking powers in the cases that the law expressly authorize it" may constrain the CNMV's ability to respond quickly.
- Spanish authorities' response:
  - This constraint is "a natural consequence of our distribution of power and the checks and balances system that is applied in Spain."
  - There exist "mechanisms that allow for swift reactions to any emerging problem in the market."
  - Authorisation of financial entities and imposition of sanctions is the responsibility of the MEC, "having taken into account the compulsory report of the CNMV", reflecting the Spanish administrative system's checks and balances.
  - The implication of two different authorities "aims at preventing any kind of discretionary decision against the interest of the entity and at promoting financial stability."

### Principle 1 — Regulatory gaps between substitutable products and PRIP initiative
- Authorities agree on "the need to avoid regulatory gaps between products with potential substitutability properties" and commit "to make all the necessary efforts to improve the cooperation between the competent domestic supervisory authorities in this area."
- They "support the current European Commission’s Packaged Retail Investment Products (PRIP) initiative", expected to produce harmonized legislation at European level on investment-like products sold to retail investors in the near future.
- Materiality note:
  - The specific issue raised by the assessors is "limited in practice", given the small size of the market for the relevant unit-linked insurance products relative to close substitutes.
  - Quantitative statement: "insurance technical reserves associated to unit-linked products and invested in CIS roughly amount to 3 percent of total CIS assets."

### Principles 12, 24, and 31 — Changes in assessment grades and supervisory strength
- The authorities note these principles "have been assigned a lower grade in comparison with the equivalent principles in the 2006 FSAP."
- Clarification:
  - The "current assessment is based on a change of the required standards" and "should therefore not be interpreted as an indication that the supervisory framework exhibits a lower level of observance compared to the 2006 FSAP."
  - On the contrary, "supervision has been strengthened over the last years."
  - In particular, the CNMV "has carried out new relevant supervisory tasks from 2006 on, mainly in connection with the activities performed by credit institutions."

### Supervision of investment services providers and conduct of business rules
- IMF recommendation: greater use of on-site inspections for supervision of conduct of business rules applied by credit institutions.
- Authorities' response:
  - Supervision of business rules "requires a different balance between on-site inspections and off-site reviews than prudential supervision."
  - On-site inspections carried out by the CNMV have reached "75 percent of the total number of clients in the last three years" (considering as inspected, in equivalent terms, one big credit institution which has been subject to three thorough and specific off-site reviews).

*Source: Spanish authorities' comments on the IOSCO Principles assessment in the IMF FSAP chapter.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12138.pdf_