Saving face

Banks are playing an ever-increasingly critical role in the Italian economy and the legislator must therefore provide an appropriate strict legal framework to rule their activities and relationships, with a particular view to protect public savings.

In this regard, attention must be paid to the relationships of banks with their own shareholder- clients and banking representatives. Indeed, by virtue of their position these subjects could impair the bank’s managerial autonomy with a view to push the bank to contract at more favourable conditions or at conditions disproportionately risky.

Reacting to scandal

The need for a strict legal framework is not just theoretical; it has been highlighted by the latest Italian financial scandals such as the defaults of Parmalat and Cirio, as well as the bank takeover bids on Antonveneta and Banca Nazionale del Lavoro.

As a consequence of these defaults and irregular takeover bids favoured not only by the atypical and conservative Italian banking environment, the Italian Legislator intervened on 28 December 2005 with the Saving Law.

This law, which has introduced a number of changes to company and financial law aimed at protecting public savings and regulating the financial market, was approved at the end of 2005 and came into force on 12 January 2006.

Among others, the Saving Law amended the Consolidated Banking Act (legislative decree 385 of 1 September 1993, ie the Italian Consolidated Law on Banking Regulation), introducing a new regime for the granting of credit by banks to their own shareholders and for the obligations of banking representatives.

Although the Saving Law cannot be considered a complete and harmonic regulation, it overhauled amended Articles 53 and 136 of Law 385/1993 dealing with the relationships between banks and their own shareholder clients, in respect of which an intervention was particularly necessary.

Indeed, before the Saving Law, Italian regulation provided that the banks, in granting credit to their clients, had to comply with the Surveillance Instructions issued by the Bank of Italy. Such regulation was not specific enough and was not appropriate for the critical matter it had to govern.

Regulatory changes

The Saving Law changed the text of the relevant article in a number of innovative ways. First, it substituted the concept of “granting of credit” with the more appropriate concept of “high-risk activities”.

Indeed the evolution of banking services has reduced credit to only one of the services provided by banks, and it was therefore necessary to find a wholly comprehensive term for every transaction that is capable of causing economic damages to the bank.

Moreover, the new regulation specifically indicates each single category of subjects submitted to restrictive regulation in relation to the entering into of high-risk transactions with the bank, including the bank’s shareholders: ie persons holding a significant or controlling interest in the bank or in its holding company; persons permitted, also by virtue of agreements, to appoint members of the managing or controlling body of the bank or its holding company; and companies controlled by the persons under the above points or at which these persons have management or control duties.

This aspect was very important in that these subjects may exercise in the most efficient way the rights connected to their shares to influence the bank’s policy when granting credit and, more generally, entering into transactions.

The Saving Law pointed out some criteria that had to be used to set the limits for the granting of high-risk activities, such as the bank’s supervisory net asset and the number of shares held by the subject concerned by the high-risk activities. With regards to the article concerned with indexed “obligations of banking representatives”, the intervention was aimed at stating the prohibition for banking representatives to enter into any obligation with the relevant bank without prior authorisation of the management and control body.

A change for the worse?

As a result of the amendments introduced by the Saving Law, the banking regulation set forth in relation to shareholder-clients and banking representatives resulted in more precise and, to a certain extent, more severe regulations.

The ‘season of severity’ lasted only one year, as Decree No 303 of 29 December 2006 implementing the Saving Law introduced new changes to certain articles that substantially brought again the regulation back to the old position.

Indeed the decree, which entered into force on 25 January 2007, intended to coordinate the provision of Law 385/1993 and of the financial law consolidated act with the position introduced by the Saving Law.

However, the amendments to Article 53, Paragraph IV may actually have worsened the provision at stake, in that the wording of the present Article 53 no longer contains the specific above-mentioned list of subjects submitted to limitation in relation to their transactions with banks, but rather the general indication of “persons who are in a position to exercise, directly or indirectly, influence over the managements of the bank, the banking group or affiliated entities”.

Moreover, Decree No 303 abrogated the paragraph of the same Article 53 that contained the indications of the criteria to be followed when determining the limitations for the high-risk activities, by providing only that the Bank of Italy has to identify the requirements and limits applicable to banks undertaking such activities with the above-mentioned persons.

As a result, despite the fact that the need to regulate the conflicts of interest has become more important for the banking sector, as underlined by the new Governor of the Bank of Italy, the Italian Legislator has again used general wordings in the regulation, the result of which makes it difficult to assess which persons are subject to what limitations.

On the other hand, Decree No 303 did not amend Article 136 of TUB correspondingly. In fact, with regard to the banking representatives, the strict set of rules for the relationships with the bank set forth by the Saving Law has been kept in force, thus introducing an illogical difference in treatment.

Further amendments

With the Saving Law the Italian Legislator considered it necessary to set out strict guidelines to regulate the relationships between the banks, on the one hand, and their own shareholdersclients and banking representatives on the other.

However, following Decree No 303, the regime eventually implemented does not appear to be a satisfactory solution. In fact, a strict regulation has been introduced only for those who formally take management decisions, while those who may otherwise substantially influence certain management choices have the benefit of more freedom.

It would appear that the Bank of Italy has showed the will to intervene by issuing the relevant implementing regulation to provide an appropriate regime for the conflicts of interest.

This intervention appears to be necessary to grant an appropriate legal framework to a sector which requires, as result of its fast and constant changes and increased level of competition, appropriate transparency and fairness.

Stefano Padovani is a partner at Negri-Clementi Toffoletto & Montironi