Volume 5, Number 19, Page 2

Venezuelan Financial System

by Daniel Vielleville of Baker and McKenzie

The Central Bank of Venezuela issued rules to promote sound competition among financial institutions and to ensure the transparency of their operations

Resolution No. 97-12-01 containing the Rules to Promote Sound Competition in the Financial System (the “Rules”) issued by the Central Bank of Venezuela (the “BCV”) was published in Official Gazette No. 36,357 of December 17, 1997. These Rules abrogate Resolution No. 9409-05 published in Official Gazette No. 36,560 of October 4, 1994. The Rules took effect on March 17, 1998, 90 days after being published in the Official Gazette.

The BCV authority to issue the Rules is found in Article 21, paragraph 21 of the special Law that governs it, which lists among the powers of the BCV the power to establish general rules to promote competition among financial institutions and to ensure the proper provision of services to users. Curiously, the Law grants such power to the BCV rather than to the Office of the Superintendent of Banking (the “Superintendent”), which in our view, would be the entity most qualified to regulate financial institutions and protect bank customers. Note that Article 20 of the Rules sets forth that any complaint from the public regarding a breach of the Rules must be filed with the Superintendent, not the BCV.

The Rules apply to institutions governed by the General Law on Banks and Other Financial Institutions (the “Banking Law”) and by the Law of the National Savings and Loan System (the “S&L Law”). The following entities are subject to the Rules: universal banks, commercial banks, mortgage banks, investment banks, capitalization companies, financial leasing companies, money market funds, exchange houses, and savings and loan entities. They also apply to financial or banking institutions governed by special laws, such as Banco Industrial de Venezuela.

The Rules provide that their purpose is to “promote sound competition among institutions governed by the Banking Law, the S&L Law, and special laws, as well as to ensure the transparency of their operations and the proper treatment of users of the services rendered by such institutions” (Article 1). The operations and services must be conducted in such a way that the customers’ full awareness of them is guaranteed (Article 2).

The most relevant aspects of the Rules are:

(a) Institutions subject to the Rules must post, in a visible place in each of their offices, the various ways in which they collect funds from the public, also setting forth whether they are covered by the Deposit Guaranty and Banking Protection Fund (Article 3). In our view, “collecting funds from the public” should be understood to be any deposit operation allowed by the Banking Law or the S&L Law, such as sight deposits, term deposits, or savings deposits, as well as other forms of sight or term fund collection allowed by those laws, including “money desk” and trust operations.

(b) Institutions subject to the Rules must announce their base reference interest rate, as well as the current annual interest rate offered for deposits from the public, including the basis for calculation, the frequency of interest, and effective yields (Article 3). This obligation implies that these institutions must notify the public how it determines the effective rate or yield for each type of deposit.

(c) Institutions subject to the Rules must post, in a place visible to the public, the nominal interest rate, penalty interest, and current annual interest rate charged for the following loan operations: (1) loans evidenced by promissory notes; (2) overdrafts, whether evidenced by documents or not; (3) financing of debit balances on credit cards; (4) draft discounts; (5) mortgages; (6) financial leasing of goods; and (7) other loan operations carried out on a regular basis (Article 5).

The Rules (Article 8) define the concept of base reference interest rate and current interest rate. The base reference interest rate is that offered by the institution in the case of lending operations “applicable to clients with best credit risks” or, regarding deposit operations, the usual or normal rate offered by the institution. The current interest rate is that “resulting from the terms and conditions of the respective transaction” and will be calculated in accordance with instructions published for that purpose by the BCV.

(d) Institutions governed by the Rules must post, in a place visible to the public in each of their offices, fees or surcharges for services related to its operations (Article 6).

(e) It should be noted that the Rules do not impose uniform, maximum, or minimum values for lending, deposit, or related operations of banks and other financial institutions. Each institution can set the rates or charges for its operations within the applicable legal limits; the Rules merely set forth the institutions’ duties to inform their customers. In all cases, an institution subject to the Rules may reach an agreement with its clients for conditions other than those announced (Articles 4, 5, and 6).

(f) Each institution must have a manual that contains all necessary information, including a complete fee schedule, so that the public has full access to the terms and conditions of the institution’s operations and services (Article 9).

(g) Clients must be informed: (i) if an operation or service involves another institution; (ii) what the identity of that institution is; and (iii) whether that institution is subject to Venezuelan law (Article 12).

(h) An institution subject to the Rules must furnish the BCV, in the manner and at the time instructed, with a copy of its announcements and manuals relating to the Rules, as well as a copy of the forms of agreements used to evidence their operations, setting forth the documents that must be signed in each case (Article 13). This provision is an innovation in that the abrogated resolution did not contain a similar provision, and this imposes a greater burden on the financial institutions subject to the Rules.

(i) Any amendment to the conditions of the agreements, operations, or services rendered by institutions subject to the Rules, other than changes in interest rates, must be reported to the client with “sufficient notice” (Article 15). The Rules do not define the period for “sufficient notice.”

(j) No institution may divulge any information regarding a client to another company without the client’s express written authorization (Article 17). This rule supports the notion of banking secrecy that has been generally accepted in banking practices and Venezuelan legal doctrine.

Failure to comply with the informational requirements contained in the Rules can subject an institution to a fine of up to 0.5 percent of the institution’s paid-in capital and reserves. If it is proven that the institution furnished false information, the fine can be increased to one percent (Articles 18 and 19). These penalties are based on Article 97 of the Law of the BCV and Article 269 of the Banking Law.

Daniel Vielleville is with Baker & McKenzie in Caracas, Venezuela. He may be contacted at (52-8)276-5111.