Market structure and trends
The consolidation of the banking industry in Belgium has
continued in the past year. At the same time, the shareholders'
structure of some medium-sized and small banks has undergone
important modifications, often implying the entry of foreign
players to the market. The strengthened presence of (European)
financial institutions has also caused an increased use of the
freedom to establish branches and the freedom to provide financial
services.
Again, the phenomenon of "bancassurance" has been in the
spotlight, through: (i) the further development of financial
conglomerates having both a banking and insurance arm; (ii) the
creation and distribution of a number of hybrid financial
instruments; and (iii) the increasing development of the respective
regulatory regimes – and their respective supervisory authorities
along the same lines.
The investment firms sector has also undergone considerable
changes. Whereas the number of stockbroking firms has decreased
(due to more stringent authorization requirements and operation
criteria), the number of specialized investment firms (especially
the portfolio management firms and the financial instrument placing
firms) has increased.
Main regulatory bodies
The Belgian Commission for Banking and Finance (CBF) was created
by Royal Decree No. 185 of July 9 1935 on the supervision of banks
and the rules governing the issue of securities.
Today, the CBF plays a pivotal role in the supervision of
financial institutions and of public transactions in securities. To
this end, it has extensive powers of on- and off-site
investigation, thereby relying on the support of its staff as well
as of accredited auditors. Moreover, it has the power to take a
number of exceptional corrective measures.
In its capacity as supervisor, the CBF sees to it that credit
institutions meet the applicable authorization requirements and
operating criteria. The CBF also collaborates with foreign
supervisory authorities – and has concluded a number of agreements
with such authorities.
Moreover, the CBF is entrusted with the prudential supervision
of investment firms, investment advice companies, exchange offices
and undertakings for collective investment.
The CBF is also responsible for the supervision of financial
information (eg relating to the public issue of securities) and the
regulated markets for financial instruments (eg Euronext (Brussels)
and Nasdaq Europe) where it exercises "second-line" supervision
complementing the "first-line" activity of the competent market
authorities.
Recently, the Belgian Minister of Finance has unveiled a
detailed proposal to review this supervisory scheme. Essentially,
this proposal provides for: (i) a better delineation of the
competence of the CBF and the respective market authorities; (ii) a
reinforcement of the decision-making process within the CBF; (iii)
a reorganization of the appeal procedures against decisions of the
CBF; and (iv) a rapprochement between the CBF and the National Bank
of Belgium.
Finally, the Office for Insurance Control (OIC) has been
entrusted with the supervision of insurance businesses (Law of July
9 1975). This regulatory body is also responsible for supervising
mortgage companies, pension funds and insurance brokers. Given the
importance of "bancassurance", the OIC has revised – and
strengthened – its collaboration with the CBF.
Types of financial institutions
Credit institutions
A credit institution is an undertaking the business of which is
to receive deposits or other repayable funds from the public and to
grant credit for its own account. The Law of March 22 1993 on the
legal status and supervision of credit institutions is the basic
legal text which applies to all credit institutions.
A specific category of credit institutions has also been
introduced, ie the securities bank (Law of March 20 1996). This is
essentially a marketing tool: its legal status is that of a credit
institution, but the law allows it to market itself in accordance
with its actual specialty (securities transactions).
Investment firms
The Law of April 6 1995 on secondary markets, the legal status
and supervision of investment firms, intermediaries and investment
advisers introduced a new legal concept: that of investment
firms.
An investment firm is defined as an enterprise the normal
business of which is to provide third parties with investment
services on a professional basis.
This law provides for four categories of investment firms : (i)
stock broking firms; (ii) portfolio management firms; (iii)
financial instrument broking firms; and (iv) financial instrument
placing firms.
Stock broking firms may, in principle, provide all investment
services and ancillary services. Portfolio management companies
may, in addition to actual portfolio management, carry out services
that include the receipt, the transmission and execution of
investors' orders. The activity of financial instrument broking
firms consists in bringing two or more professional investors in
touch with each other in order to enable them to carry out a
transaction in relation to a financial instrument. A financial
instrument placing firm is allowed to place securities under a less
straining status than that of stock broking firms. However, only
stock broking firms may receive financial instruments and, under
certain conditions, deposits, from their clients.
Investment advice companies
The rules relating to the activities of investment advice
companies are laid down in the Law of April 6 1995 and in a Royal
Decree of August 5 1991 and regulate advice rendered with regard to
financial instruments provided to the public in return for payment,
by a person who acts in a professional capacity.
Exchange offices
The Royal Decree of December 27 1994 on exchange offices and
currency trading applies to all natural and legal persons
established in Belgium who, as professionals, carry out spot buying
or selling transactions in foreign currencies, whether in the form
of cash payments, checks made out in foreign currencies, or credit
or debit cards, with the exception of: (i) stock broking firms;
(ii) credit institutions; and (iii) the Belgian post office.
Undertakings for collective investment
An undertaking for collective investment (UCIT) is an entity,
with or without legal personality, which invests funds for a number
of investors. The legal status and operation of such UCIT's is
regulated by Book III of the Law of December 4 1990.
As far as Belgian UCIT's are concerned, the law recognizes two
categories of UCIT's: (i) investment undertakings with a variable
number of units (open-ended structure); and (ii) investment
undertakings with a fixed number of units (closed-ended
structure).
An open-ended structure is a UCIT whereby the holders of parts
in such UCIT may sell such parts back to the undertaking at net
asset value. With respect to closed-ended structures, the units
are, on request of the holders, not repurchased by the undertaking
itself, but by a separate company or through the securities
exchange.
Both types of investment undertakings can be incorporated either
as: (i) investment funds (ie having a purely contractual
structure); or (ii) investment companies (ie having separate legal
personality).
On May 18 2000, the CBF promulgated a circular letter to ensure
that such undertakings would be managed in an independent manner
and solely in the interest of the investors. While the major market
players have already adapted to the principles laid down in this
circular letter, a smaller market participant has instigated
proceedings before the Belgian Administrative Supreme Court (Raad
van State/Conseil d'Etat). The Supreme Court has suspended the
circular letter and the decision on the application for the
invalidation of the circular letter is still pending at the time of
writing.
Insurance companies
An insurance company is an undertaking active in the insurance
business. The Law of July 9 1975 contains a description of the
categories of activities for which authorization is needed. A basic
distinction is made between life assurance undertakings and
non-life insurance undertakings.
Establishing an operation
Foreign financial institutions wishing to establish an operation
in Belgium can either: (i) open a branch in Belgium; or
alternatively (ii) establish a subsidiary in Belgium. The
principles with regard to the regulatory requirements can be
summarized as follows:
Branches: EU financial institutions. EU
financial institutions like credit institutions, investment
companies and insurance companies can open a branch in Belgium
after their respective competent authorities of their home member
state have informed the CBF or OIC (for insurance companies) of
their intention to do so. The CBF or OIC will not be entitled to
prevent the opening of such branch in light of the "home country
control" principle, but before the financial institutions can
commence their operations in Belgium, the CBF or OIC will have
sufficient time to organize its (limited) supervision and to
communicate to the financial institution such steps it must take in
order to facilitate or comply with the CBF's or OIC's (limited)
supervisory tasks. The CBF or OIC will also communicate to the
financial institution a list of rules and regulations which are
considered to be of Belgian "public order" (general good) and which
must be complied with by the new branch (eg consumer protection;
money laundering; liquidity rules; monetary policy rules; data
protection).
Branches: non-EU financial institutions. By
contrast, financial institutions from outside the EU that would
like to establish a branch in Belgium must apply for such opening
with the competent Belgian regulator (CBF or OIC) as if a new
Belgian financial institution with full legal personality were to
be created, and hence must comply with all requirements and obtain
all approvals as are imposed on Belgian financial institutions.
Subsidiaries. The creation of a subsidiary, ie
one with a separate legal personality, implies the creation of a
new Belgian company and hence the submission to the full Belgian
applicable regulatory regime. The most important requirements will
relate to share capital, identity of shareholders, management,
internal organization and, for credit institutions and investment
firms, adherence to the Belgian deposit protection scheme.
Besides the regulatory aspects, a number of other aspects must
also be taken into account which mainly relate to corporate law
(incorporation; registration; publication of information); tax law
(VAT) and employment law (work permits; professional cards;
registration with social security administration). In this regard
it must be noted that branches must not only publish information in
Belgium with regard to the Belgian branch but also with regard to
the company of which the branch depends (the extent of such
disclosure requirements will again depend on whether such company
is located inside or outside the EU).
It might be useful to draw the attention to the existence of the
Royal Decree of December 20 1995 regarding foreign investment firms
(the RD of 1995). The RD of 1995 creates the framework within which
EU and non-EU investment firms are allowed to offer services in
Belgium, with or without having an establishment or branch in
Belgium. The possibility for non-EU investment firms to provide
services in Belgium without having an establishment or branch in
Belgium, is a possibility that does not exist for non-EU financial
institutions regarding banking services.
Financial services online/e-banking
Today, new technology is revolutionizing the operation of, and
access to, markets (eg alternative trading systems or online
broking). It is transforming the rendering of financial services
(eg web advertising). It is acting as a catalyst for the creation
of new financial services and new business models (eg day trading
centers), often triggering new alliances involving
telecommunications, information technology and financial services
providers.
However, financial institutions wishing to use these new
technologies still face a number of regulatory uncertainties. On
May 5 2000, the CBF laid down a number of guidelines for the
organization and internal control of electronic financial services
in a circular letter.
These guidelines are based on two widely accepted principles.
First, a financial institution offering financial services via the
internet is required to comply with all legal and regulatory
provisions applicable to these transactions in the same way as via
other distribution channels. Second, the institution is required to
have an appropriate structure in place, as well as safeguard
arrangements for electronic data processing, and to have adequate
internal control procedures to cover the specific risks attendant
on this distribution channel.
With regard to the issue related to the rendering of transborder
services, the national regulators (including the CBF) have in
general adopted a pragmatic approach, deciding whether an offer of
services is being made on or from their territory based upon a
number of targeting criteria (eg use of language or currency). A
financial institution should take concrete measures in order to
avoid being considered to be offering services in a certain
jurisdiction in accordance with these criteria, for example by
disclaiming and refusing business outside of the targeted
range.
Apart from these regulatory issues, one also faces the question
of the validity and enforceability of agreements entered into over
the internet. In Belgium, the Civil Code has been amended to
proclaim that electronic documents and signatures (under certain
conditions) can be used in court (Law of October 20 2000). In the
meantime, a draft bill is pending which will create a framework for
certification service providers, fully implementing the EU
Electronic Signatures Directives No. 1999/93/EC.
The centerpiece of European legislation for a coherent and
integrated approach to the legal aspects of electronic commerce is
the Electronic Commerce Directive No. 2000/31/EC. It intends to
remove the current legal uncertainty and to create an area without
internal borders for information society services. Belgium has not
yet implemented this directive.
The Distance Selling Directive No. 1997/7/EC, implemented in
Belgium by the Law of May 25 1999, excludes financial services from
the scope of its application. It obliges the supplier to provide
the consumer with certain important information prior to the
conclusion of the contract and with a confirmation of that
information in durable form. The European Commission has proposed
an "Amended Proposal for a Directive on Distance Selling of
Financial Services", in order to especially regulate financial
services.
Another question often raised is how financial institutions,
doing business over the internet, can fulfil their obligations
stemming from money laundering laws, such as: (i) the obligation to
identify their customers; and (ii) the obligation to report and/or
refuse the execution of suspicious transactions (see Belgian Law of
January 11 1993). The lack of direct physical contact with the
clients makes it more difficult to apply these laws. On May 3 1999,
the CBF issued a circular letter addressing this issue.
One must also take into account the restrictions imposed by data
protection legislation. The Belgian lawmaker has enacted the Law of
December 8 1992, as amended by the Law of December 1998. This
legislation: (i) provides for general rules on the lawfulness of
the processing of personal data (eg principle of purpose or quality
of data); (ii) enumerates the rights of the data subject (eg notice
requirement and rights to access, correct or block personal data);
(iii) contains safeguards with respect to the confidentiality and
security of processing; (iv) installs a commission for the
protection of privacy; (v) requires prior notification of
processing operations to this commission; and (vi) regulates the
transfer of personal data to countries outside the EU.
Buying financial institutions
Each Belgian credit institution, upon incorporation, must apply
for a banking licence with the CBF. One of the conditions for such
banking licence to be granted, is the notification to the CBF of
the identity of the shareholders that, directly or indirectly, own
5% or more of the credit institution's capital. The CBF can refuse
to grant the banking licence if it is not convinced of the
suitability, from a point of view of a sane and prudent management
of the credit institution, of the significant shareholders
thereof.
After incorporation, important changes in the direct or indirect
shareholders' structure of a Belgian credit institution must be
notified to the CBF. The threshold for the obligation to notify is
legally set at, again, 5%.
A notification requirement is imposed on both the entity or
entities that will acquire, directly or indirectly, a block of 5%
or more of the credit institution's capital and the entity or
entities that will transfer, directly or indirectly, a block of 5%
or more of the credit institution's capital. In addition, the
credit institution itself, must notify the CBF of the acquisition
or transfer of its shares provided that the threshold of 5% is
exceeded.
The notification by the "acquirors", must be made prior to the
acquisition of the shares of the credit institution, ie the CBF
must be notified of the intention to acquire such shares. In
theory, the CBF can raise objections against the acquisition of the
shares within three months from the receipt of such notification,
if it is not convinced of the suitability, from the point of view
of a healthy and prudent management of the credit institution, of
the entity that notified the acquisition. The notification by the
"transferors" must be made at least one month prior to the intended
transfer. The notification by the credit institution, must be made
as soon as the credit institution is informed of the acquisition or
transfer of its shares.
The CBF has issued sample notification forms. These sample
notification forms provide a guideline for both the form and the
contents of the notifications.
The guidelines of the CBF provide furthermore that in case of an
indirect participation, as is the case here, one single
notification can suffice for a "control chain". The CBF recommends
that such single notification is made by the company that is the
highest up in the chain, acting on behalf of the entire control
chain.
The same rules are applicable, mutatis mutandis, to Belgian
investment companies and Belgian insurance companies (the latter
ones working with a threshold of 10% of the capital), as well as to
the Belgian branches of non-EU financial institutions.
Specific transparency regulations exist with regard to the
disclosure of change of holdings in Belgian listed companies and
the change of control of Belgian public companies. Public takeover
bids are regulated by law as well (see law of March 2 1989 on the
disclosure of important participations in listed companies and on
public takeover bids).
Finally, it must be pointed out that the significant
shareholders (this must be interpreted on a case-by-case basis
taking into account the specific shareholding structure of the
bank) of a Belgian bank must sign an Annex to the Protocol on the
autonomy of the banking function in which they accept the
provisions of the Protocol, commit themselves to take all necessary
measures in order to guarantee a prudent and sound management of
the bank and to take the public interest into account in setting
the general policy of the bank.
Competition regulations/concentrations
Thresholds
The Belgian rules on the notification and clearance of mergers
are set out in the Law of August 5 1991 on the Protection of
Economic Competition (the Competition Law). These rules have been
modeled on the EU Council Regulation No 4064/89 of December 21 1989
on the control of concentrations between undertakings (the Merger
Control Regulation) and accordingly require a "concentration" to be
notified to the Belgian competition authorities if the following
thresholds are reached:
- the aggregate turnover realized in Belgium by all of the
undertakings concerned amounts to at least euro 40 million ($34
million); and
- at least two of the undertakings concerned each realize a
turnover in Belgium of euro 15 million or more.
Therefore, if the envisaged concentration only implies two
parties, no notification in Belgium is required where either of the
parties implied in the concentration have an aggregate Belgian
turnover of less than euro 15 Million. With respect to the
computation of the turnover of banks, credit institutions and
"other financial institutions", the Competition Law (Article 46 §3)
still requires the application of the balance sheet test formerly
used at EU level, ie turnover is defined as one-tenth of the
balance sheet total of the undertakings concerned. The issue is
often which portion of the calculated turnover of the parties
involved in the concentration must be allocated to Belgium. The
former Article 5(3) of the Merger Control Regulation provided that
the total turnover within one member state was to be replaced by
one-tenth of the total assets, multiplied by the ratio between
loans and advances to credit institutions and customers in
transactions with residents of that member state (in this case,
Belgium) and the total sum of the worldwide loans and advances. The
latter rule is not expressly contained in Belgian legislation but
in view of the close relationship between the Belgian and the EU
rule in this area we believe that it may be applied (see Decision
No. 2000-C/C-01 of January 25 2000 (Fortis/Belgo Factors)).
Timing
Concentrations that meet the thresholds are to be notified to
the Belgian competition authorities ("Raad voor de
Mededinging/Conseil de la Concurrence") within one month of the
conclusion of the agreement that contemplates the
concentration.
The Belgian competition authorities have 45 days to determine
whether the proposed concentration raises serious doubts as to its
admissibility. Until a decision has been taken, the parties cannot
implement any measures that would make the concentration
irreversible or alter the market structure permanently. In case of
non-compliance fines and periodic penalty payments can be imposed.
An appeal can by made with the Court of appeal in Brussels.
Besides regulating concentrations, the Belgian Competition Law
also contains a prohibition on all agreements, decisions and
concerted practices which have as their object or effect the
prevention, restriction or distortion of competition within the
Belgian market, or any significant part thereof.
Continuing bank supervision
By its nature, banking entails the assumption of a wide array of
risks. The CBF can rely on the support of its staff as well as of
accredited auditors to monitor on a continuing basis the observance
of the authorization and operating criteria (as described above and
below) which are designed to limit imprudent risk-taking.
To this end, the CBF has means of collecting, reviewing and
analyzing reports and statistical returns from banks on a solo and
consolidated basis (Article 44 of the Law of March 22 1993).
In turn, banks are obliged to have in place administrative,
bookkeeping and internal control arrangements that are adequate for
the nature and scale of their business (Article 20 of the Law of
March 22 1993 / CBF Circular Letter D1 97/4).
They are also required to draw up and publish financial
statements in accordance with consistent accounting policies and
practices (Royal Decrees of September 23 1992).
Disclosure requirements
As indicated above, Belgian financial institutions, and Belgian
branches of non-EU financial institutions, must keep the competent
Belgian regulator timely informed of possible changes with regard
to significant changes in its shareholdership. The same sort of
information obligation exists with regard to the management of the
Belgian financial institutions and the non-EU financial
institutions that have a Belgian branch. Indeed, in order to obtain
a Belgian licence, the CBF or the OIC must be convinced of, among
others things, the suitability, professional reliability and
relevant experience of the management of the financial institution.
Therefore, the CBF or the OIC must be notified of possible changes
in the management, sufficiently in advance of such change to allow
the CBF or OIC to consider the appropriateness of the new
management, as well as the effect of such change on the activities,
organization and prudential supervision by the CBF or OIC.
When a financial institution becomes insolvent
As described above, the CBF has extensive investigative powers
in order to detect problem institutions in a timely manner. Where
problems are remediable, the CBF can take exceptional corrective
measures, going from the appointment of a special inspector or a
temporary director to the suspension or withdrawal of an
institution's authorization.
If an institution is no longer viable, the CBF will insist on
the prompt and orderly closure of such institution. Under Belgian
law, the financial institution may seek creditor protection (Law of
July 17 1997) or be declared bankrupt (Law of August 8 1997). In
principle, Belgian law follows the concept of the unity and
universality of the bankruptcy.
In the event of a deficient credit institution or investment
firm, the best interests of depositors and investors are
safeguarded through the implementation of deposit-guarantee and
investor-compensation schemes (Law of December 17 1998 / Royal
Decree of February 15 1999). The details of the functioning of
these schemes are laid down in a Communication of February 25 1999.
With regard to securities held on a fungible basis (book-entry)
with financial institutions that are affiliated with the Belgian
CSD (BXS-CIK), full recovery of such deposited securities in the
event of an insolvency of such financial institution, is guaranteed
by the application of the Royal Decree no. 62 of November 10 1967
enhancing the circulation of securities.
Capital requirements for banks and bank secrecy
Capital requirements
According to Article 82 of the CBF Regulation of December 5 1995
relating to own funds of credit institutions (as amended and
coordinated by the CBF on July 4 2000) (the 1995 CBF Regulation)
Belgian credit institutions and Belgian branches of non-EU credit
institution must satisfy three solvency ratios:
- their own funds must exceed the total of their fixed (and
assimilated) assets;
- with regard to the credit risk, their own funds must at
least be equal to 8% of the risk-weighted assets (risk-asset
ratio) (chapters IV to VIII of the 1995 CBF Regulation provide
for similar solvency ratios for a number of other risks, like
counterparty risks, interest rate risks, exchange rate risks,
etc); and
- their own funds must exceed a percentage going from 6% to
2% of the liabilities to third parties according to a declining
scale in amount of such liabilities (gearing ratio).
Own funds sensu stricto (Art. 14, §1, 1° of the 1995 CBF
Regulation) consists of the following items:
- paid-in capital plus share premiums;
- reserves and profits brought forward; and
- funds for general banking risks.
from which the following items must be deducted:
- loss of the exercise and loss carried forward;
- incorporation and formation expenses;
- intangible fixed assets;
- own shares held by the credit institution; and
- unbooked risk reserves which should have been booked
according to the CBF.
Other items may be added, under certain conditions and only up
to 100% of the own funds sensu stricto (Art. 14, §1, 2°):
- revaluation surpluses;
- internal security funds;
- funds collected by means of securities for an indefinite
period and other financing instruments and satisfying to
certain conditions set forth under Article 14, §2); and
- subordinated debts and fixed-term cumulative preferential
shares satisfying certain conditions set forth under Article
14, §3, up to maximum 50% of the own funds sensu stricto.
Article 14, §4, lists other items that have to be deducted from
a credit institution's own funds, among which notably shareholdings
in, and claims on, affiliated or other group enterprises, except if
those amounts result from standard banking transactions. All
obligations or undertakings in support of affiliated or other group
enterprises should also be deducted.
This deduction is aimed at avoiding the so-called "double
gearing". To restore the balance, Article 16, §6, 1° provides that
all items which have to be deducted from the own funds pursuant to
Article 14, §4, have also to be deducted from the risk-weighted
assets.
The capital requirements of stock broking firms has been set
forth by the CBF in its Regulation of December 5 1995 relating to
own funds of stock broking firms (as amended and coordinated by the
CBF on July 4 2000).
Bank secrecy
The duty of confidentiality of Belgian credit institutions is a
duty of a contractual (or tortious) nature, and has never been
embodied in a statutory provision. A breach of a Belgian bank's
duty of confidentiality is not a criminal offence, but the Bank may
be liable for damages incurred by its clients due to such a breach.
The nature of the duty and its resulting liability will depend on
the circumstances.
Exceptions to the confidentiality rule can be found in: (i) the
agreements entered into between the banks and their clients; (ii)
the Belgian Judicial code or the Belgian Code of Criminal
Procedure; (iii) other specific legislation like taxation codes,
the laws on consumer credit and the laws on money laundering. An
important exception to the banking secrecy principles, with which
many banks are faced daily, is the information a bank must provide
to a creditor of a client who has served a third-party attachment
(garnishee order) against the bank. Notwithstanding all this, it
must be noted that the principle of confidentiality is clearly
established in Belgium and that banks, when faced with valid
disclosure requirements from public authorities or private persons,
must not depart from this principle: they must ensure that the
person or authority requesting the information has adhered to the
procedural rules to do so and the bank must limit the provision of
information or document to the minimum required.
June 1 2001
Eubelius
Goedheidsstraat 5-7 Rue de la Bonté
Brussels, B-1000
Tel: +32 2 538 6869
Fax: +32 2 538 6867
www.eubelius.com