A. Legal Mandate and Objectives

12. A well-defined legal mandate is essential to support the supervisory authority’s autonomy and accountability. An adequate formulation of its legal mandates entails a clear definition of the objectives (i.e., the interests to be protected), tasks, and powers entrusted to the supervisory authority. Together, if explicit in the legislation, they create a solid legal underpinning that will serve: first, as guidance to the authority for the pursuit of its responsibilities, including when carrying out multiple objectives; second, as a yardstick to assess whether the authority’s resources have been appropriately allocated for the discharge of its mandate; and third, to justify the level of autonomy needed vis-à-vis the political bodies and the financial sector industry, and the corresponding accountability. Finally, if the supervisory authority is granted with multiple legal mandates, their fulfilment may raise conflicts should they, at times, become mutually exclusive, in part or as a whole. The legislation would then need to provide an array of mechanisms to address this (i.e., prioritization and hierarchy of objectives, granting the authority ample discretion to determine relative priority at a given circumstance, and/or assigning different governance and decision-making structures to support each objective).

13. CMF’s legal mandates could be more clearly defined. Two major shortcomings can be noted:

• On one hand, the organic law of the CMF recognizes as the objectives of the agency to: (i) ensure the proper functioning, development, and stability of the financial market, and (ii) facilitate the participation of the market agents and promote the public faith.² The law also requires that, the CMF, for achieving those objectives must maintain “a general and systemic vision” and consider “the interests of investors, depositors, insured, and the public interest.”³ The following issues arise from the current wording:

  • (i) first, these provisions do not discriminate between the different legal mandates of the CMF particularly regarding its prudential mandate in its two key dimensions: micro- and macropudential aspects;

  • (ii) second, the recognition of the “development of the financial market” as one of the CMF’s objectives raises questions as to the extent that this objective is appropriate for a supervisory authority and the conflicts that it may create with the other objectives; and

  • (iii) finally, a number of provisions opt to refer to the objectives in a more general manner without identifying to which legal mandate they correspond, suggesting that there is a confusion between the different legal mandates and the objectives to be pursued (e.g., the use of preventive and corrective measures is not linked to any specific objective (e.g., prudential supervision) and is generally justified by the protection of the shareholders, investors, depositors and insured, as well as the public interest and financial stability).⁴

• On the other hand, the specialized laws that regulate the areas within the scope of supervision of the CMF, i.e., General Banking Law, Insurance Law,⁵ and Securities Market Law⁶ do not provide for clear objectives or purposes and nor are they coherently aligned with the general mandate provided under the organic CMF Law.

14. While these weaknesses as a starting point can be addressed through internally and externally communicated statements, ultimately these are best addressed through legal reform. It is advisable that in each law governing the specific mandate—i.e., the specialized laws regulating the banking, insurance and capital markets area, provides expressly its precise objective.⁷ Also, the organic law of the CMF should be aligned with the corresponding provision of these specialized laws providing the different CMF’s legal mandates. It could also provide for its role in contributing to the stability of the financial system (see Section VI).⁸ This is essential to support the legal certainty of the legal instruments to be used within the broad discretion bestowed on the supervisory authority. Pursuant to administrative law principles, an administrative act must be adopted in accordance with the objective of its respective legal mandate.

15. Pending a legal reform, and to guide the new CMF in fulfilling its new legal mandates, its internal rules could clarify the objectives (i.e., the interests to be protected). During this transition the CMF must have a clear view of its current and new mandates and how to achieve them in the formulation of policy and the day-to-day performance, particular in situations of conflict (see following paragraph on this issue). To this end, the CMF could elaborate a statement describing how it understands its mandates, the objectives for each mandate, and how it perceives an eventual ranking between these mandates in case of conflict. While this issue should be clarified in the law over the medium-term, in the interim, this statement could be communicated to the political authorities/bodies (i.e., Ministry of Finance and Parliament) and the stakeholders in the context of the CMF’s accountability framework.⁹

16. In addition to clarifying the legal mandates, an operational framework must be put in place to manage conflicting objectives. Some supervisory decisions may have to deal with tradeoffs regarding the compliance with different legal mandates. See for example the continuing tension with supervised entities subject to prudential supervision (banks, insurance undertakings) that are also listed on a financial market or that of banks needing public financing regarding its own funds requirement while a complete communication of their financial situation to the investors may cause the failure of the financing operation. These cases illustrate clearly the conflict between the mandate to safeguard the safety and soundness of supervised entities and in the end the financial stability and the one to preserve the investors and the trust in financial markets. Particularly when it is not the law itself that clearly prioritize the choice between different objectives, to address this conflict two key actions could be taken, on the basis of the existing mandates in the legal framework:

• firstly, adopt a framework of rules governing the manner to manage these situations¹⁰ (e.g., internal rules for conflict of interest, rules for sharing of information between departments,¹¹ etc.); and

• secondly, design and implement an operational framework at the level of the staff and of the decision-making bodies (see Section V for recommendations on the internal organization of the CMF).

17. The design of this latter operational framework should be in line with the internal organization of the CMF and follow a three-pronged approach. As a first consideration, the internal organization of the CMF should be designed in way that allows the identification of cases in which more than one mandate/function will need to be considered and would likely cause a conflict of interest between them (see institutional design recommended in Section V of this report). As a second consideration, an operational framework could be designed to manage conflicting objectives. In this respect, a three-level approach can be designed: (i) the treatment of the case by each operational Department; (ii) the identification of the conflicting issues arising from the case; and (iii) the decision of the competent decision-making body based of its awareness of the conflicting situation and the prioritization of the objectives of the CMF’s legal mandates. Under the first level, a case must be handled and appreciated by the respective internal department in accordance with the sole objective of its mandate (e.g., conduct supervision), and this without self-censorship. In this respect, the communication of the factual information must be effective between each concerned department to the others in order to allow a treatment of the material facts under each legal mandate. At a second level, the internal organization must provide a framework to identify potential conflicts deriving of the respective treatments of the case. This could be achieved at the level of committees (as recommended in Section V) since their composition would reflect the different responsibilities of each department; this level would make a proposal of arbitrage to the decision-making body, namely the Board (the third level), which should assume the final arbitrage in accordance with the prioritization of objectives. In reconciling such conflicts, the overriding objective should be the maintenance of financial stability.

B. Powers

18. The necessary legal powers for banking supervision have been transferred to the CMF. By replacing the SBIF with the CMF throughout the General Banking Law and in particular in Article 2, the CMF will benefit from all legal instruments given to the banking supervisory agency.¹² However, from a good legislative technique perspective, the list of “powers” provided by the CMF Law raises a number of observations: (i) the organic law of an integrated supervisory agency such as the CMF Law should include only general provisions governing broad and common powers, and tools that are used in the different legal mandates of the authority instead of listing the very specific ones related only to a particular mandate (e.g., Article 5 CMF Law); and (ii) specific powers and tools should be reserved to the specialized laws (see Articles 112 and following of the General Banking Law). This could be a consideration to take in future legal reforms.

C. Autonomy

19. A robust autonomy of a supervisory authority relies on four key elements: Institutional (to which degree is the agency subject to instructions from political or public bodies), personal (do the key officials of the agency enjoy a sufficient degree of autonomy from political and private interests), functional (in executing its mandate, does the agency depend on actions of other public bodies), and financial (does the agency have sufficient financial resources to execute its mandate).

20. While the autonomy of the CMF has been strengthened (compared to the previous set up of the SVS and the SBIF), some elements could be further strengthened. Important improvements were achieved in the institutional and personal autonomy of the CMF at the time of its creation. However, some shortcomings as described below and detailed in Annex V remain:

• Strengthen the institutional autonomy by providing explicitly the autonomy of the CMF for the exercise of its functions and preventing instructions from political organs or other bodies other than those authorized by law.

• Strengthen the personal autonomy of the Board members by: (i) tightening the criteria for appointment to require appropriate knowledge and several years of experience on banking, securities, and insurance sectors for the Board members individually, and for the Board as a collective to have the required skills specific to the markets regulated under the CMF’s competence; (ii) extending the “double veto” appointment procedure to the President of the CMF; (iii) grant a six-year term of office to the President as it is the case for other Board members; (iv) provide the same due process safeguards for dismissal procedure to the President of the CMF as those recognized to other Board members; and (v) to restrict civil liability to the case of bad faith or gross misconduct found against the officials for actions or omissions in the exercise of their functions under the law.

• Strengthen the financial autonomy by providing the CMF the power to propose to Congress its own budget adequate to fulfil its mandate, commensurate to (if not benchmarked against) the industry fees, and not subject to any ceiling imposed by the Executive during budget preparation or if so, according to a multiyear planning prepared by the CMF.

Secondary legislation could strengthen the legal protection (personal autonomy) for CMF senior management and staff, providing for example insurance against liability.

21. The continued involvement of the BCCh in the adoption of supervisory rules and decisions potentially hampers CMF’s functional effectiveness. Both the Banking Law and the Central Bank Law provide prerogatives to the BCCh regarding prudential supervision of banks by means of prior approval mechanisms or issuing regulations.¹³ The mission was informed that this involvement responds historically to the need for a checks and balances mechanism vis-à-vis the SBIF’s decision-making process (under the single Superintendent regime), its role of lender of last resort, and to the fact that currently the BCCh provides full guarantee over sight deposits. However, a number of considerations suggest that this approach could be reconsidered:

• The justification is weakened by the fact that the CMF’s main decision-making body (Board) is collegial, providing an intrinsic checks and balances mechanism;

• External control regarding the CMF’s actions is better dealt with a robust framework of accountability to its stakeholders;

• Opinion on regulations related to the BCCh’s mandate with respect to macroprudential issues would be more transparently and adequately provided to the CMF through the CEF;

• The institutional arrangements for the financial safety net in Chile need to be reconsidered in line with best international practices. In this regard, the role of the BCCh to provide guarantee over sight deposits might be better addressed by the adoption of an effective resolution framework that reduces moral hazard and the creation of a deposit insurance scheme.¹⁴

22. For banking supervision, the new arrangements appear to fall short of full compliance with the relevant Core Principles for Effective Banking Supervision. Clarity of objectives, transparency, accountability, effective interagency coordination and adequate resourcing of banking supervision are essential elements of these Principles. In addition, it is yet unclear how the integration will affect the resources available for banking supervision. While the mission has no reason to assume that the new CMF will redirect existing bank supervision resources to its other mandates, it recognizes that the financial autonomy that the SBIF enjoyed—in the sense of being able to present and argue for its own budget—will be lost because the budget for banking supervision will no longer be determined on a stand-alone basis but within the broader mandate and priorities of the new CMF. Also, in this context, it will be important for the new CMF to clarify internally and externally how it interprets and prioritizes its mandates.

A. Internal Twin Peaks

29. There is no single “best practice” blueprint for an integrated supervisory authority like the CMF. Nonetheless, lessons learned from the global financial crisis and elsewhere suggest the following high-level principles for designing the organizational structure of the new CMF:

• Clear separation of activities and accountabilities between prudential supervision—focused on the safety, soundness, and risk management of individual financial institutions—and securities market surveillance—focused on the fair, efficient, and transparent operation of markets and the conduct of market participants.

• A well-defined coordination framework for the supervision of financial conglomerates and for the assessment of financial stability issues.

• Integration of common procedures and activities (such as development of policy proposals, authorizations (routine or otherwise), research, statistics and financial analysis) to achieve economies of scale and scope. An integrated policy department, for example, would promote cross-fertilization of policy approaches and skills, and avoid fragmentation of the policy-making process in the CMF. An integrated financial analysis group would provide economies of scope in the analysis of industry and market-wide trends.;

• Centralization of all “back office” functions (human resources, finance, IT, etc.) to pursue cost efficiencies.

In this structure, trade-offs between the CMF’s objectives would be the responsibility of the CMF Board. Experience suggests that conflicts of objectives can arise, for example, between prudential supervisors wishing to operate discreetly to resolve an emerging risk issue and securities markets supervisors wishing to promote maximum transparency in the interests of investors. In reconciling such conflicts, the overriding objective should be the maintenance of financial stability. As noted in Section III, however, this priority is not explicit in the mandate of the new CMF but could usefully be clarified in internal rules and a public mission statement (see paragraphs 13–17).

30. Given the chosen institutional set-up, the main alternative to the existing sectoral approach would be an internal “twin peaks” model (see Annex IV). Two variants of this model, which involve different roles for the Board in the running of the CMF, are considered below. The model is not a pure twin peaks model because the peaks are not fully self-contained; activities such as policy development, financial analysis, and authorizations would be common and the responsibility of other dedicated areas. Compared to a purely institutional approach, three main benefits from this model are the organization of activities by objective, allowing potential conflicts of interest and tradeoffs to be assessed more explicitly at the highest level in the organization,²⁴ consistency in the application of conduct rules across sectors, and promotion of efficiencies in the use and development of specialized skills.

31. The central feature of this model is the separation of the CMF’s activities into four distinct groups. A prudential supervision group would include the front-line prudential supervision activities of the bank, insurance and securities markets intendancies, each staying as separate intendancies, as well as a specialist risk department that would provide detailed technical assessments and expertise on major risk types to each intendancy. A market surveillance group would include the oversight of market conduct and performance, and bring together the consumer protection activities currently located in separate intendancies. A policy and research group would draw together the regulation, research, financial analysis and statistics activities currently duplicated in separate intendancies. This group would also process applications for authorization to operate in the Chilean financial system, working in conjunction with relevant prudential supervisors. A fourth group would have general administrative responsibilities. Finally, a small number of specialized units (internal audit, legal, enforcement, cabinet) would report directly to the Board.

B. Internal Decision Making and Coordination

32. To ensure that decision-making processes are not unduly slowed within this structure, the current discretion to heads of departments within the SBIF and the CMF should be preserved. However, there will be a clear need for coordination within and between the separate groups to prevent the emergence of siloed views and to ensure a system-wide perspective on emerging risk, conduct and financial stability issues. Coordination will also be essential in any framework for supervision of financial conglomerates, discussed later.

33. Coordination could be achieved through the establishment a Committee structure between the Board and the heads of intendancies, with each Committee headed by a Commissioner. These Committees would serve as “sounding boards” on emerging issues (including resourcing issues) before full Board engagement is needed, and as a means of ensuring timely and relevant information sharing within the CMF. Each Committee would have a Charter and defined membership at intendancy head level, although other staff could be invited to participate as necessary; however, the Committees would not have decision-making authority. A Prudential Supervision Committee, for example, would include the heads of the four intendancies in that group, as well as the head of regulation and the Chair of the Policy and Research Committee. A Market Conduct Committee would include the heads of the two intendancies in that group as well as the heads of regulation and legal. The Chair of that Committee could attend the Prudential Supervision Committee if, for example, emerging conduct issues threatened reputational damage to particular institutions. A Policy and Research Committee would include the heads of the regulation and research intendancies; since this Committee would also be the focal point for the CMF’s financial stability responsibilities, it would also include the heads of the four prudential supervision intendancies and the Chair of the Prudential Supervision Committee. An Administration Committee would include the heads of the three intendancies in that area.

34. A Committee structure with designated roles for Commissioners has several advantages. It would enable the CMF to draw on the particular skills, background, and experience of Commissioners in allocating Committee chair roles. It would help to avoid duplication and mixed signals by Commissioners in operational matters, and it would free the Board to focus on high-level policy and strategic issues without the risk of being swamped by routine matters. On the other hand, by engaging Commissioners more fully in the day-to-day running of the organization, the Committee structure may be seen to detract from the Board’s broader responsibilities for oversight of the CMF, which call for a degree of distance and objectivity.

35. An alternative that enshrines the oversight role of the Board would be to replace the Committee structure with a layer of Executive General Managers (EGMs). The EGMs would be responsible for the performance of their respective groups but would also have clear obligations to cooperate with each other in the areas envisaged for the four Committees. An EGM layer would add an additional rung to the career ladder in the CMF, which could prove an effective incentive and retention device for senior staff whom the CMF might be loath to lose; however, it would be costly, and it would leave open the question of how to make the most effective use of the talents of executive Commissioners on a day-to-day basis.

C. Conglomerate Supervision

36. The establishment of the new CMF provides an essential foundation for a more effective framework for conglomerate supervision. Integration of banking, insurance and securities markets supervision will, firstly, facilitate the formation of a group-wide view of individual conglomerates by eliminating any “frictions” to the exchange of information previously held in the separate agencies. (Though restrictions on sharing information relevant for the supervision of financial institutions have been removed under guidelines developed by the CSF, the mission understands that information flows have not always been seamless.) Secondly, integration will enable the development of a consistent methodology for assessing risks in a conglomerate emanating from double gearing, contagion, and conflicts of interest; once the necessary legislative support is available, it will also enable the establishment of harmonized minimum prudential standards in areas such as corporate governance, liquidity, and risk management.

37. There is no accepted “best practice” within integrated supervisory agencies for the organization of conglomerate supervision. Some agencies have assigned the supervision of conglomerates—particularly those with material operations in more than one financial industry—to supervisory “teams,” which cut across industry lines and bring together supervisors from each relevant industry under a lead supervisor. Other agencies have recently moved from a supervisory teams approach to an arrangement in which the lead supervisor of the dominant member of a conglomerate “outsources” the supervision of smaller members to supervisors in the relevant industry department. In other agencies again, separate departments are responsible for the supervision of conglomerates.

38. In the new CMF, a “lead supervisor” model based on the existing intendancies may be a pragmatic first step in establishing a framework for consolidated supervision. In this model, for example, the supervisor of a bank that dominates a particular conglomerate group would be designated as “lead supervisor” for that group, and would be able to draw on relevant supervisors in the other intendancies in undertaking risk assessments of the group. Supervisors would remain in their industry intendancies to minimize organizational disruption as the new CMF settles; for this reason, however, coordination arrangements would need to be established at head of intendancy level, and the availability of relevant staff would need to be agreed as part of the annual supervisory planning cycle. Any disagreement over resourcing or priorities for supervision of the group, either in the planning stage or as new risks emerge, would be reconciled in the Prudential Supervision Committee or by the EGM, if either of these governance structures were to be adopted.

39. There is precedent for the “lead supervisor” model in the case studies of conglomerates prepared under the auspices of the CFS. These case studies, intended to gain a better understanding of the conglomerate’s structure, business model, and risks have been led by the supervisor in charge of the main financial activity of the conglomerate. The case study structure provides the basis for “deep dives” into the governance, solvency, and liquidity of conglomerates. Within the new CMF, however, such studies will presumably be replaced by ongoing and structured risk assessments for all significant conglomerates.

40. Oversight of conglomerates has strengthened since the IMF’s TA report on conglomerate supervision in September 2015.²⁵ The new CMF should be in a good position, building on the work done by its predecessors, to realize the objectives that the short-term recommendations of the provided TA aimed to achieve. Legislative changes that provided supervisors with the capacity to require financial information from the final owners of banks, insurance companies, and pension fund administrators have ensured a better mapping of conglomerate structures and enhanced the information base for risk assessments. To date, however, information requests have been largely confined to public (and hence audited) information on conglomerate members because of data quality concerns. Using the expanded data base, the SBIF has been developing a methodology to provide a risk rating for conglomerates on three main criteria— solvency, systemic importance, and corporate governance and risk management—taking into account both quantitative and qualitative assessments of the main risks facing each conglomerate. The methodology is being applied to 17 bank-dominated conglomerates.

41. Nonetheless, the legal framework in Chile does not cover conglomerate supervision and this shortcoming was not addressed in the recent legislative reforms. Hence, the significant gap between the Chilean framework and the Joint Forum’s Principles for the supervision of financial conglomerates (2012), highlighted in the IMF’s TA report (and mostly related to the medium-term recommendations of the TA), remain (see Annex III). The current legal framework does not provide supervisors with the necessary powers and authority to enable comprehensive group-wide supervision; supervision is authorized only for a financial institution and its subsidiary. Supervisors do not have the power to set minimum prudential standards for corporate governance, capital adequacy, liquidity, and risk management for a financial conglomerate. Nor do they have the authority to impose sanctions on or require corrective actions by a financial conglomerate.

42. Notwithstanding the lack of legal powers at the conglomerate level, the new CMF needs to establish its “moral authority” in this area and be willing to draw on it. As a start, the Board of the CMF together with senior supervisors should meet with the Board at the top of each significant conglomerate to outline the CMF’s supervisory expectations for risk management within the group and to emphasize a “no surprises” approach in the group’s dealings with the CMF; the CMF should also confirm its intention to actively pursue appropriate tools for conglomerate supervision making maximum use of its existing powers. Such meetings should then become part of the regular supervisory cycle. In the same spirit, supervisors should be encouraged to take a more assertive approach to pursuing improvements to data quality in key risk areas rather than what appears to be a cautious approach of accepting only public data.²⁶

A. Microprudential and Conduct Cooperation Arrangements

43. With the integration of the SBIF into the CMF, the CSF could effectively be replaced by bilateral relationships. There seem to be limited areas of common interest shared by all three authorities (BCCh, the new CMF, and the Superintendence of Pensions). In the area of life and disability insurance regulation, the CMF and the Superintendence of Pensions have a clear common interest in coordination and information sharing on regulatory and supervisory developments, but this is not an obvious area of interest for the BCCh. Hence, to ensure continuity in the relationship with the Superintendence of Pensions, the CMF should consider assigning a specific Board member as first point of contact and the responsibility for maintaining the bilateral relationship (and regular meetings) with that Superintendence.

44. A similar bilateral relationship is needed between the new CMF and the BCCh. As indicated in Section III, there are several banking supervision issues, which are more microprudential in nature, for which the prior approval of the BCCh is required. The impact of BCCh’s involvement on the effectiveness of the CMF has been questioned above. At this moment these issues are coordinated between the SBIF and BCCh. This liaison should continue under a bilateral relationship between the new CMF and the BCCh, with a CMF Board member assigned responsibility for coordinating this relationship. A seamless transition of this relationship from the SBIF to the new CMF will be key for realizing the issuance of the anticipated new Basel III regulatory framework. Given the importance and structural impact of these regulations, the CMF and the SBIF should set up a mechanism to involve the CMF in the interim period (before the integration) to guarantee the strategic continuity and alignment of the position of the SBIF on these matters with the post-integration position of the new CMF. The steering committee structure proposed in Section VII could be instrumental in this regard.

45. The CMF should review and notify the counterparties of MoUs concluded under the SBIF’s competence. All domestic (e.g., the UAF and SERNAC) and foreign authorities that have concluded cooperation agreements with the SBIF should be notified of the legal transfer of competences from the SBIF to the CMF. Where both the SBIF and UAF had MoUs in place (e.g., with SERNAC), these will be need to be reviewed to incorporate the matters covered in a single MoU.

B. Financial Stability and Macroprudential Cooperation Arrangements

46. While the integration of the SBIF in the CMF should not fundamentally affect the current arrangements, the representation of banking supervision in the CEF will change. In practice, integration means that bank supervision will no longer be represented separately in the CEF. However, the CEF Law allows representatives of its members to be accompanied by persons and in a manner as required by the internal rules of its members. To assure continuity in decision making and given the systemic importance of the banking sector, the new CMF should give consideration to involving the responsible intendent (or EGM) for Banking Supervision and/or Policy and Regulation in the CEF. It will also be important to maintain continuity of bank regulation and supervision staff in the CEF’s working groups.

47. The new CMF may be better placed to contribute to the analytical work of the CEF, given its anticipated ability to consolidate and strengthen its research function. The new CFM will be able to draw on microprudential data from the banking, insurance, and securities markets, allowing the development of a more holistic bottom-up view of emerging risks to financial stability, complementing the traditionally more macroeconomic and top-down perspective of a central bank. To realize the consolidation and strengthening of the research function, consideration should be given to its position in the internal organization (see Section V), which should also be supported (and clarified) by the priority assigned to this part of the mandate in the mission statement of the new CMF (see Section III). Discussions with key stakeholders indicated that there is significant scope to develop a research/financial stability function in the new CMF complementing the work of the BCCh.