Protection for holders of savings and investment products

In the context of the so-called hybrid instrument (mainly preferred shares) and subordinated debt burden-sharing exercises, which endeavor to ensure that creditors of troubled financial institutions bear their correct share of the restructuring or resolution costs of those institutions, through Royal Decree-Law 6/2013 the Government intends, on the one hand, to monitor claims filed by customers against financial institutions owing to the misselling of those complex products and to make available in certain cases expeditious dispute settlement mechanisms, primarily through arbitration, and on the other hand, in exceptional cases, to provide liquidity to the shares that the holders of those instruments will receive in exchange, considering that those shares will not trade on a regulated market.

1. Hybrid instrument and subordinated debt monitoring committee

In respect of the first aim, the hybrid instrument and subordinated debt monitoring committee has been created, with the main purpose of analyzing and reviewing arbitration processes relating to preferred shares at the institutions that have received public support. This committee will be made up of senior executives from the National Securities Market Commission (“CNMV”), the Bank of Spain, the Secretariat-General of Health and Consumer Affairs, the Secretariat-General of the Treasury and Financial Policy, and the Consumer and User Council.

The committee’s main functions will be to:

• Analyze the factors behind the judicial and nonjudicial claims filed.
• Submit a quarterly report to the Lower House of Parliament on the fundamental aspects of the claims.
• Submit proposals, where appropriate, to the competent authorities aimed at enhancing investor protection in the sale of products of this kind.

Determine the basic criteria to be applied by institutions in which the FROB (the Agency through which the restructuring of the Spanish financial sector has been executed) has a holding to allow their customers to have any disputes arising in connection with any hybrid capital instruments or subordinated debt submitted to arbitration, permitting them, if the arbitration award is in their favor, to receive appropriate compensation for any economic loss caused. The committee has also been commissioned to identify the customer groups whose cases should receive priority treatment at the institutions owned by the FROB.

2. Liquidity mechanism for shareholders of institutions undergoing restructuring

As, in the framework of the restructuring of the Spanish financial industry, subordinated debt instruments and preferred shares may be swapped for capital (shares) of institutions undergoing restructuring that are not listed on secondary markets, which is the case of Catalunya Banc (CX) and Nova Galicia Banco (NCG), the Government has brought in a mechanism whereby the Deposit Guarantee Fund (the “Fund”) will provide liquidity to the holders of illiquid shares of those institutions.
By means of this mechanism, the Fund will acquire the unlisted shares resulting from the conversion of hybrid capital instruments and subordinated debt, giving preference to the shares held by customers facing particular difficulties.

The Fund is also authorized to subscribe to shares or debt of the SAREB (Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, the so called Spanish bad bank), which means that it can co-operate with the FROB to fund this instrument.

For the above purposes, a special contribution has been established for Fund member institutions equal to 3‰ of eligible deposits, to be paid in two tranches (40% in the first 20 days of January 2014 and the remaining 60% in seven years as from January 1, 2014).

In the case of the first tranche, special rules have been set for contributions from certain institutions, most notably: (i) they do not apply to institutions that are majority-owned by the FROB; (ii) they may be reduced by up to 50% in the case of member institutions whose calculation base does not exceed €5 billion; and (iii) they may be reduced by up to 30% of the amounts invested by the institutions, before December 31, 2013, to subscribe to or acquire shares or subordinated debt instruments issued by the SAREB.