What is the supervisory regime for registered pawnbrokers pursuant to Article 106 of the TUB?
Registered pawnbrokers under Article 106 of the TUB are subject to regulatory supervision in order to protect financial stability and ensure the sound and prudent management of supervised entities. In accordance with the principle of proportionality, the supervisory regime reflects the complexity and size of each organization, as well as the nature of its operations. In view of the above, certain provisions of Title V of the TUB shall not apply to pawnbrokers, as laid down in Title VII of Bank of Italy Circular 288/2015.
The Bank of Italy performs its supervisory role with due regard for the entrepreneurial nature of the supervised entities, which are free to set their own strategies, organizational models and investment policies in compliance with a prudential regulatory framework.
The Bank conducts analysis and takes measures to promptly identify any signs of potential anomalies in the intermediaries’ technical and organizational structures and urges them to take appropriate corrective measures. The Bank of Italy performs both documentary checks – by collecting, processing and systematically analysing a comprehensive set of statistical, accounting and administrative information – and on-site inspections to confirm the quality and accuracy of the data provided by intermediaries and to have a better understanding of their organizational and management arrangements. On-site inspections are tailored to reflect the characteristics, size and complexity of each intermediary and focus on material risks, corporate governance and internal audit.
Controls cover all aspects of business operations, with a focus on the solidity of their organizational structures, the quality of risk management and risk mitigation, capital adequacy in the event of losses, fairness and transparency vis-à-vis customers.
Is there an application form?
There is no standard form. However, Bank of Italy Circular 288/2015 lists the documents to be attached to the application and includes templates for the proposed business plan and the organizational structure report.
What documents should be attached to the application?
The information and documents to be attached to licensing applications are listed in Bank of Italy Circular 288/2015. As a rule, the following documents are required:
- memorandum and articles of association;
- business plan and organizational structure report;
- list of direct and indirect shareholders, with the values of their holdings. For indirect holdings, the entity through which the interest is held must be specified;
- documents confirming that the direct and indirect qualified shareholders meet all requirements;
- group chart;
- proof of payment of capital contributions to the minimum extent required by applicable provisions, issued by the head office of the bank where the payment was made;
- information on the origin of the money used to pay capital contributions;
- fit and proper certificates for members of the management body, including with reference to interlocking rules laid down in Article 36 of Decree Law 201/2011.
Depending on their situation and business model, applicants may be required to produce additional documents for preliminary assessment (e.g. an expert analysis for any contributions in kind).
The documents referred to in points d), g) and h) above must be no older than 6 months prior to the date of submission of the licensing application.
What should the corporate purpose clause read in the articles of association?
The corporate purpose clause shall list the intermediary’s business operations, with no mention of any financial services that it does not offer or intend to offer within the time horizon covered by the business plan.
Can pawnbrokers offer ancillary or related services?
Yes, pawnbrokers are governed by financial intermediary regulations, with a few exceptions:
- they cannot engage in offering operating leases on an ancillary basis;
- they cannot acquire shares in other financial or non-financial undertakings.
Can pawnbrokers acquire property for corporate use?
Yes, they can acquire buildings to be used as part of their financial operations, including office space, housing units to be rented to employees, real estate to be held for debt recovery purposes and any other property acquired for pursuing the corporate purpose of the buying entity or of other group entities.
How does the Bank of Italy assess the ownership structure of a pawn lending business?
When assessing licensing applications from newly-incorporated entities, the Bank of Italy pays particular attention to the financial soundness and the quality of shareholders, in order to make sure that the applicant will be able to manage start-up risks and, in the event of a crisis, to minimize the costs associated with value destruction.
For this purpose, the Bank of Italy will assess the quality of the qualyfied shareholders (i.e. investors that hold at least 10 per cent of the shares or voting rights or can exercise a significant influence over the intermediary) and the financial soundness of the business plan, based on the following criteria: the good repute, ethics, professionalism and expertise of those who, as a result of the acquisition of a qualifying holding, will perform administrative and management functions in the intermediary; the financial soundness of the qualyfied shareholders; the intermediary’s ability to comply with the provisions governing its business following the acquisition of a qualifying holding; the suitability of the group structure of the qualyfied shareholders for the purposes of effective supervision; no grounds to suspect that the acquisition is associated with money laundering or terrorist financing. These assessments are carried out in line with the provisions of Article 19 of the TUB and the Bank of Italy Measure of 26 July 2022.
The analysis of the applicant’s ownership structure does not result in a separate decision on qualifying holdings or follow the procedures laid down in the relevant legislation, but feeds into the preliminary assessments for licensing purposes.
This analysis is carried out based on the information and documents produced in accordance with the Bank of Italy Measure of 26 October 2021.
What does the Bank of Italy assess in terms of corporate governance and members of the management body?
The Bank of Italy assesses the intermediary’s governance structure for risk management capabilities, consistency with the prospective business scope and size, and transparency in the allocation of tasks among corporate boards and in investor relations.
In addition, the Bank of Italy conducts fit and proper (F&P) assessments on corporate officers in administrative, management and audit functions, which is key to ensure sound and prudent management.
Members of the management body must meet all F&P requirements as laid down in Article 26 of the TUB and in Ministerial Decree 169/2020.
Financial intermediaries are responsible for identifying fit and proper corporate officers. Moreover, they must ensure that the appointees meet the F&P requirements and criteria throughout their term of office.
Members of the management body must also comply with interlocking rules laid down in Article 36 of Decree Law 201/2011.
What should be included in the business plan?
The content of the business plan is covered by Bank of Italy Circular 288/2015. The document, to be drawn up by the directors based on the complexity and size of the organization, as well as the nature of its operations (‘principle of proportionality’), must contain:
- an overview of the applicant’s operations and prospective business lines;
- a description of its technical and organizational structure, internal control system and IT system;
- provisional budgets for the first three financial years showing investment amounts, expected financial results, and compliance with the prudential requirements for the first three years of operation, both in a baseline scenario and in an adverse (i.e. stress) scenario.
How does the Bank of Italy assess applicants’ business plans?
The Bank of Italy will assess applicants’ business plans for: a) sustainability, taking into account the required start-up investment and prospective business volumes; and b) compliance with all capital requirements since inception.
In view of the peculiarities of pawn lending, which exposes intermediaries to operational risks, the Bank of Italy’s assessments will focus on customer protection and transparency of contractual conditions, compliance with anti-usury legislation, anti-money laundering safeguards and know-your-customer processes, legal/reputational risk management and the safekeeping of pledged assets.
Shareholders may be required to commit to providing financial support to the company for business development purposes or in the event of financial distress.
What should be included in the organizational structure report?
The organizational structure report, to be drawn up in accordance with Bank of Italy Circular 288/2015, shall include at least the following:
- composition, role and functioning of corporate bodies;
- composition and role of any committees;
- rules on conflict-of-interest and compensation policies;
- risk appetite framework;
- credit and finance regulations;
- organizational chart with the number of resources allocated to each unit.
In addition, given the nature of pawn lending, applicants are required to illustrate their asset valuation and risk monitoring processes (including in terms of expert appraisers’ liability), in line with industry regulations.
With reference to the description of the internal control and risk management system, the documents to be submitted must specify, for each control function:
- roles, responsibilities and reporting lines;
- responsibilities of function heads;
- number of persons allocated to each unit;
- annual internal audit plan.
The report shall include the regulations on key corporate processes (e.g. internal regulation, credit regulation).
Can the Bank of Italy run specific checks on applicants as part of the licensing process?
The Bank of Italy may order an assessment of the overall viability of an applicant’s corporate structure and check the existence and amount of its capital. For this purpose, it may use its own inspectors or request a third-party appraisal. Depending on the applicant’s line of business, the Bank may highlight additional points to be assessed and recorded in the assessment report.
Can existing companies apply for registration under Article 106 of the TUB?
Existing companies wishing to start a pawn lending business must adopt a resolution to change their corporate purpose and any other articles of association as required. The licensing application shall be submitted after the resolution to change the articles of association is approved and before this change is recorded in the Italian business register.
When does the Bank of Italy deregister a pawn lending business pursuant to Article 106 of the TUB?
The Bank of Italy shall remove a financial intermediary from the register established pursuant to Article 106 of the TUB in cases where its licence is withdrawn or has lapsed.
Likewise, financial intermediaries will be deregistered in the event of voluntary dissolution or change of corporate purpose. In such cases, the application for removal shall be sent to the Bank of Italy by the company or its liquidators within 10 days of the corresponding decisions being entered into the business register.
Under what conditions does a licence lapse?
The licence will lapse if the pawn lending business:
- expressly renounces it within 12 months of its issue;
- has not started operations within 12 months of licensing.
A limited extension, normally not exceeding 6 months, may be granted for cause at the request of the intermediary, to be submitted at least 60 days before the 12-month time limit expires.
Once the licence has lapsed, the Bank of Italy shall deregister the intermediary and the latter shall change its corporate purpose accordingly.
Under what conditions is a licence withdrawn?
Without prejudice to the cases of licence withdrawal permitted by law, the Bank of Italy shall withdraw the licence from, and deregister, a pawn lending business if it finds that it has not engaged in business for more than 18 consecutive months.
The licence shall be withdrawn in accordance with Article 113-ter of the TUB if the pawn lending business has assets from operations referred to in Article 106(1) of the TUB. Otherwise, the corporate purpose shall be changed.
