Trends and Developments
Economic and Banking Market Backdrop
Portugal continues to be an attractive target for investment. The stock of foreign direct investment more than doubled in the past 15 years, reaching 70% of GDP in 2022. Portugal's favourable geographical position, educated workforce and high share of renewables in its energy mix make it an appealing destination, particularly amidst global supply chain reconfigurations due to ongoing events such as the war in Ukraine.
Another aspect to consider, the disbursement of the Next Generation EU Funds, a key driver of Portugal's growth, is set to accelerate. These funds, amounting to circa EUR22 billion and with over EUR13 billion yet to be allocated, are expected to further stimulate economic growth through infrastructure development and reforms.
Portugal's labour market continues to demonstrate resilience, with employment levels reaching historic highs post-pandemic. Although challenges such as labour shortages persist, government initiatives to attract migration and improve education aim to alleviate these pressures.
In terms of fiscal performance, Portugal's external position and government debt continue their favourable trajectory – net government debt has now dropped below 100% of GDP.
Overall, while Portugal faces various economic and political challenges, its strategic investments, fiscal prudence and resilience in the face of external pressures position it as an increasingly solid and attractive market for players in varied sectors.
As to the most prominent players in the Portuguese banking market, continuing the ascending trend of the previous couple of years (post-COVID-19), CGD, Santander, Novobanco and BPI together had a profit of EUR1.2 billion in the first quarter, which corresponds to an increase of over 33% vis-à-vis the first quarter of 2023.
Notwithstanding this relatively promising backdrop, the banking industry is navigating a rapidly changing landscape characterised by technological innovation, evolving regulatory requirements and shifting customer expectations. To succeed in this dynamic environment, banks must embrace innovation, enhance resilience and prioritise customer-centricity. Additionally, they must focus on sustainability and adapt to an evolving regulatory landscape to remain competitive and relevant.
Market Trends
Digital transformation and technological innovation
Digital transformation remains a critical priority for banks. The acceleration of digital adoption during the pandemic has led to a significant overhaul of banking operations and customer engagement models. Banks have been investing in digital capabilities, aiming to provide integrated customer experiences across multiple channels from mobile apps to online platforms.
Furthermore, distributed ledger technologies like blockchain are being explored to revolutionise traditional banking processes such as cross-border payments, trade finance and identity verification. These technologies offer enhanced transparency, reduced fraud and lower transaction costs, providing a competitive edge in a rapidly evolving market.
Customer-centric strategies
The shift towards customer-centricity continues to be a key trend in the banking industry. Customers now expect personalised, seamless experiences akin to those provided by leading technology companies and fintech disruptors. To meet these expectations, banks are leveraging data analytics to gain insights into customer behaviour, preferences and needs, allowing them to offer tailored products and services.
The adoption of agile methodologies and entering into strategic partnerships with fintech firms may be key to enhance their technological capabilities and expand their offerings. By embracing a customer-first approach, banks aim to build long-term relationships and foster loyalty in an increasingly digital and competitive environment.
Cybersecurity and risk management
As digital transformation accelerates, cybersecurity has become an increasingly critical concern for the banking industry. The rise in digital transactions and the proliferation of online services have increased the risk of cyber-attacks, necessitating robust security measures to protect sensitive customer data and ensure trust.
Investing in advanced cybersecurity technologies, such as AI-driven threat detection, inter alia, may be key to safeguard operations against increasingly sophisticated cyberthreats. Additionally, and particularly considering the current global context, focusing on enhancing risk management capabilities will be crucial to prepare for a wide range of potential disruptions, including economic downturns, geopolitical tensions and climate-related risks.
Sustainable finance
Year after year, sustainable finance is gaining greater prominence in the banking industry as environmental and social issues become increasingly important to stakeholders. Banks are expanding their green finance portfolios, offering products and services that promote environmental sustainability and support the transition to a low-carbon economy.
This shift towards sustainable finance is driven by regulatory mandates, investor expectations and societal pressures, encouraging banks to play a more active role in addressing global challenges such as climate change and social inequality. By integrating environmental, social and governance (ESG) considerations into their lending and investment decisions, banks contribute to sustainable development while mitigating risks associated with environmental and social factors.
Legal Trends
Evolving regulatory landscape – CRD IV and CRR III
On 19 June, two significant legislative texts for the European banking sector were published in the Official Journal of the European Union. These are part of the European Commission's 2021 banking package.
- Directive 2024/1619 (CRD VI) amends the 2013 Directive on the access and supervision of credit institutions and investment firms, and introduces regulations regarding supervisory powers, sanctions, third-country branches and ESG risks.
- Regulation (EU) 2024/1623 (CRR III) updates the 2013 Regulation on prudential requirements for credit institutions and investment firms, addressing credit risk, credit valuation adjustment (CVA) risk, operational risk, market risk and the output floor.
This legislative package aims to: (i) complete the implementation of the Basel III reforms from 2017, (ii) support sustainability and a green transition, and (iii) strengthen the supervisory powers of competent authorities.
Key changes in CRD VI – establishment of branches for third-country banking services
Post-Brexit, there has been a lack of consistent regulation for third-country banking groups in the EU. CRD VI introduces a new framework for third-country branches, covering authorisation, capital adequacy, liquidity, governance, risk management and supervisory requirements. Third-country banks must now have a physical presence in a member state to offer services like taking deposits, granting loans or providing guarantees. Exceptions include services provided on the client's sole initiative or services to EU credit institutions.
Additionally, CRD VI introduces proportionality in regulatory requirements based on the risk posed by these branches to EU market stability, categorising them into two classes based on asset size and activity. These rules will apply from 11 January 2027 (with some exceptions).
Key changes in CRD VI – enhanced supervisory powers for significant operations
CRD VI strengthens the supervisory powers of competent authorities over significant operations, such as acquiring substantial holdings, transferring assets and mergers involving supervised entities. These operations are subject to prior notification and assessment, with authorities having 60 working days to object if the operations could impact the prudential profile of the entities or raise concerns over money laundering or terrorist financing. Non-compliance can result in significant penalties, including fines of up to 10% of annual net turnover or twice the profit gained from the offence.
Key changes in CRD VI – ESG risks
CRD VI mandates credit institutions to integrate ESG risks into their governance, risk management and strategy, aiming for climate neutrality by 2050. Institutions must establish processes to identify and manage ESG risks, with proportional requirements for smaller institutions. The European Banking Authority (EBA) is expected to provide guidance by 2026, and changes to the systemic risk reserve now include climate-related risks.
Key changes in CRD VI – suitability of board members and key function holders
The Directive harmonises rules across the EU for assessing the suitability of board members and key function holders. It introduces requirements for a pre-appointment assessment, ongoing suitability reviews, and detailed role descriptions and governance mapping. Competent authorities are given powers to remove unsuitable members or enforce corrective measures.
Key changes in CRD VI – crypto-assets
CRD VI ensures that institutions exposed to crypto-assets have adequate risk management processes. It highlights various risks associated with crypto-assets, including information and communication technology (ICT), cyber-risks, legal issues and money laundering.
Key changes in CRD VI – strengthening independence rules for competent authorities
The Directive requires member states to ensure that supervisory authorities operate independently, transparently, and without conflicts of interest. This includes setting clear criteria for appointments, cooling-off periods for post-service employment, and mandatory declarations of interests.
Changes to CRR III – brief notes
CRR III aims to provide legal certainty and fulfil international commitments by incorporating elements of the Basel III reforms. Key changes include:
- output floor – establishes a minimum threshold for banks' capital requirements to reduce variability and enhance comparability;
- capital requirements for market risk – the adjustments reflect the Basel Committee's 2019 review;
- CVA risk – new methods for calculating capital requirements are introduced;
- operational risk – a new standardised approach replaces existing models; and
- proportionality measures – reduce the regulatory burden on smaller, non-complex institutions.
Entry into force and implementation deadlines
CRD VI entered into force on 9 July 2024. For their part, member states must incorporate CRD VI into national law by 10 January 2026. The only exceptions are some specific provisions, including the new rules on the establishment of branches of entities based in third countries and their supervision. These rules will apply from 11 January 2027. However, existing contracts concluded before 11 July 2026 will apply from that date. CRR III also entered into force on 9 July 2024 and will apply from 1 January 2025, except for some specific provisions that will apply immediately (ie, from 9 July 2024).
Evolving regulatory landscape – AML
On 19 June 2024, a new European Union legislative package aimed at combating money laundering (anti-money laundering (AML)) and terrorist financing (counter-terrorist financing (CFT)) was published in the Official Journal of the European Union. This legislative and regulatory framework comprises four key proposals:
- Regulation (EU) 2024/1620 – establishes the European Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA);
- Regulation (EU) 2024/1624 – sets uniform rules to standardise AML/CFT measures across member states;
- Directive (EU) 2024/1640 – amends and updates previous directives, setting out the required mechanisms for AML/CFT in the financial system; and
- Directive (EU) 2024/1654 – amends existing rules to enhance authorities' access to bank account information and streamline the use of transaction records for criminal investigations.
This new legislative package aims to address key challenges identified by market participants and regulators, including:
- inconsistent regulatory frameworks due to the lack of direct applicability of EU rules established through directives; and
- lack of centralised AML/CFT supervision, leading to co-ordination difficulties among various national authorities across member states.
This new framework has the following main objectives:
- establishing a single EU rule book for AML/CFT (ie, a comprehensive regulation that consolidates all AML/CFT rules, replacing the previous model that was based primarily on directives); and
- enhancing EU-level supervision and co-ordination through the creation of AMLA and the establishment of financial intelligence units (FIUs) in each member state to monitor suspicious transactions.
Highlights of the new legislative package
Regulation (EU) 2024/1620
This regulation creates AMLA, a new authority tasked with the following.
- Co-ordination and harmonisation: Standardises action criteria and issues technical guidance to facilitate co-operation and information exchange among FIUs.
- Supervision: Directly supervises high-risk financial entities, including credit institutions and financial groups, which are classified based on risk indicators such as product types, customer profiles and geographic reach. AMLA has the authority to impose financial penalties on these entities. Supervision of other entities remains under national jurisdictions.
- Sanctioning powers: Grants the AMLA the authority to issue binding decisions and impose administrative and financial sanctions for non-compliance with AML/CFT regulations.
Regulation (EU) 2024/1624
This regulation introduces several significant changes, including the following.
- Expanded list of obliged entities: Now includes crypto-asset service providers, crowdfunding platforms, mortgage and consumer credit intermediaries, entities assisting third-country nationals in obtaining EU residence permits, luxury goods traders and professional football clubs and agents involved in certain transactions.
- Enhanced rules on beneficial ownership: More detailed requirements for identifying the beneficial owners of companies to ensure transparency.
- Customer due diligence: Increases the threshold for occasional transactions to EUR10,000.
- AML/CFT officer requirement: Requires entities to appoint a "compliance manager", who must be an executive board member responsible for ensuring the entity's AML/CFT policies align with their risk exposure. Additionally, entities must appoint a "compliance officer", fulfilling roles similar to those already required under some national laws such as Portugal's Law 83/2017.
- Additional measures: Introduces requirements for periodic assessments of AML/CFT compliance officers, specific rules for parent companies and subsidiaries, and restrictions on relationships with shell institutions and crypto-asset service providers.
Although many of these rules align with existing national laws, such as Portugal's Law 83/2017, financial institutions will need to update their AML/CFT policies to comply with the new EU-wide standards.
Directive (EU) 2024/1640
This directive, known as the Sixth AML/CFT Directive (AMLD 6), aims to strengthen the EU financial system's capacity to combat AML/CFT risks and improve cross-border co-operation. Key provisions include the following.
- Identification of additional sectors at risk: requires member states to identify sectors beyond those already obliged under previous directives that are exposed to AML/CFT risks.
- Regulation of residence rights linked to investment: Establishes specific rules for granting residence rights in exchange for investment, to prevent misuse for money laundering or terrorist financing.
- Continuous vetting of management and owners: Imposes an ongoing obligation to verify the good repute of senior management and beneficial owners, with the possibility of removing individuals from management positions if convicted of AML/CFT offenses.
- Central register of beneficial owners: Enhances rules regarding the creation of and access to central registers of beneficial owners by authorities and obliged entities.
- Automated centralised mechanisms: Requires member states to establish systems that allow authorities to identify all persons holding or controlling payment or bank accounts, including virtual accounts and safe deposit boxes, in their territories. These systems must be accessible to FIUs and AMLA and be connected via the Bank Account Registers Interconnection System (BARIS).
- Enhanced access to real estate information: Mandates that authorities have a single point of access to information about property ownership and transactions.
Directive (EU) 2024/1654
This directive focuses on improving access to financial information for preventing, detecting and investigating serious crimes, particularly terrorism. Key features include the following.
- Cross-border access to bank account information: Introduces new rules ensuring that national authorities can directly and immediately access bank account information in other member states via BARIS when necessary for criminal investigations.
- Recording of financial transactions: Requires financial institutions, including crypto-asset service providers, to comply with technical specifications for recording transactions to assist in criminal investigations, including asset tracing and freezing.
These comprehensive updates are designed to create a more robust, cohesive and centralised framework for combating money laundering and terrorist financing across the EU. As a result, all covered institutions will need to adapt their policies and procedures to align with these new EU regulations.
Evolving regulatory landscape – non-performing loan (NPL) package
Directive 2021/2167 of the European Parliament and of the Council of 24 November 2021, on credit servicers and credit purchasers, set out to create the appropriate environment for credit institutions to deal with NPLs on their balance sheets and reduce the risk of future NPL accumulation, namely by helping credit institutions to better deal with loans that become non-performing by improving conditions for the sale of the credit to third parties.
While the content of Directive 2021/2167 has been widely discussed, it is expected that its transposition to Portuguese law will be concluded before the end of 2024. This will be one of the most relevant subjects in the Portuguese banking industry in the upcoming months and will most likely have some impact on next year's market trends.
Originally published by Chambers and Partners
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