Financial Institutions Explained: Mutuals, Lending & Credit Services
Understanding Financial Institutions
This document outlines key aspects of financial institutions, focusing on mutual insurance entities and various credit institution activities.
Mutual Insurance Entities
Mutual insurance entities operate as a form of voluntary insurance, funded by fixed or variable premium contributions from mutualists or other protective persons or entities. Their key features include:
- Non-profit operation: Mutuals are fundamentally non-profit organizations.
- Inseparable status: The status of the policyholder or insured is inseparable from that of the mutualist.
- Equal rights and obligations: Partners within the mutual entity have equal rights and mutual obligations.
- Limited liability: Liability for corporate debts is limited to an amount less than one-third of the contributions met in the last three fiscal years.
- Voluntary incorporation: Joining a mutual entity is entirely voluntary.
- Direct risk assumption: Social welfare mutuals directly assume the risks for their members.
- Minimum membership: A minimum of fifty people is required to form these entities.
Regulations and Requirements for Insurance Entities
The operation of insurance entities is subject to strict regulations and requirements:
Administrative Authorization
Access to the insurance sector is subject to prior administrative authorization issued by the Ministry of Economy and Finance. Companies applying for such authorization must submit a program of activities to the General Directorate of Insurance.
Financial Security Requirements
Insurance companies must maintain a series of financial guarantees, including technical provisions, a solvency margin, and a guarantee fund.
Compliance and Control Measures
Certain actions by insurance companies can be considered administrative violations. These are classified as minor, serious, and very serious, and can be penalized, upon instruction from an administrative file by the General Directorate of Insurance, with penalties ranging from monetary fines to the revocation of the insurance activity authorization. Serious and very serious violations lapse after five years of their commission, while minor violations lapse after two years.
Intervention in Entity Liquidation
The law establishes several grounds for dissolving insurance companies. After a series of administrative procedures, this results in a liquidation period that concludes with the extinction of the entity. Unless the company has reached its statutory end, dissolution requires the agreement of the board or assembly. If a meeting is not called, or if an agreement to dissolve the company cannot be reached despite legal grounds, the Ministry of Economy and Finance will proceed with administrative dissolution.
Credit Institutions and Their Activities
Credit institutions are authorized to engage in a wide range of activities, providing essential financial services:
Lending Activities
This includes various forms of credit, such as consumer credit, mortgage lending, and financing transactions for commercial establishments.
Factoring Services
Companies engaged in factoring finance all their activities, including research and customer classification, accounting for debtors, and, in general, any other activity that supports the administration, evaluation, security, and financing of credit. The company whose primary activity is factoring assumes invoices and, generally, accounts receivable from their buyers. The factor is responsible for collecting from purchasers and, in some cases, assumes defaults that are not passed on to the seller. Companies engaged in factoring usually belong to large financial institution groups and, in addition to collection and loan financing, generally provide customer research and posting services.
Leasing (Financial and Operational)
Leasing includes activities that typically accompany this funding formula. A lease is a contract whereby a person, wishing to use a specific asset or production equipment they have previously selected, instructs a leasing company to purchase it and rent it to them for a specified period. After this period, the user can choose to extend the lease, buy the property for a predetermined price, or return it to the lessor. Leasing can be of two types: operational and financial. In operational leasing, the leasing company is usually a manufacturer who pays for repairs and maintenance. In financial leasing, the leasing company is a holding company, and the cost of maintenance and repairs are paid by the tenant user. In financial leasing, it is not common for goods to be returned because they are often complex equipment.
Credit Card Issuance
This activity, which can be undertaken by financial institutions, involves issuing cards to consumers, allowing them to make payments and be billed the amount later, either in a single payment or in installments. Companies that accept these cards receive their sales proceeds and ensure collection, paying a pre-agreed commission to the card issuer, who bears the risk of default by the purchaser.