EBA Consultation Paper on Internal Governance Guidelines
The European Banking Authority has issued a Consultation Paper on Draft Guidelines on Internal Governance.
Proposed revisions to the European Banking Authority (EBA) Guidelines on internal governance (the EBA Guidelines) are currently under consultation. The revised EBA Guidelines will replace the existing guidelines on 26 June 2021 which will coincide with the implementation of the Investment Firms Directive and Investment Firms Regulation (IFD/IFR). The proposed revisions are complemented by separate proposed changes to the Joint ESMA and EBA "Guidelines on the assessment of the suitability of members of the management body and key function holders". This update looks at the key changes.
Scope changes will mean that, for the most part, only credit institutions will be caught. Only those current "CRD investment firms", who meet large and systemic investment firm criteria after the IFD/IFR's implementation in June 2021, will still be subject to the EBA Guidelines. Other so-called "class 2" MiFID investment firms (which will include a number of CRD investment firms currently subject to the EBA Guidelines) will effectively be subject to a new set of corporate governance requirements that are scheduled for separate consultation in Q1 2021 under the IFD/IFR regime. We have therefore referred to in-scope entities as "credit institutions" in this update.
The revised EBA Guidelines propose the following enhancements:
- Credit institution boards will be responsible for the establishment, approval and oversight of the implementation of an adequate and effective internal governance and internal control framework to ensure compliance with anti-money laundering and counter-terrorist financing obligations.
- Credit institutions should assign responsibility for ensuring the credit institution’s compliance with 4MLD requirements to a member of the management body in its management function or where such a body does not exist to the person effectively directing the credit institution's business.
- Credit institutions should add considerations related to AML/CFT and tax offences (including dividend arbitration schemes) to lists of acceptable and unacceptable behaviours that form part of board corporate values policies and conduct codes. The specific inclusion of dividend arbitrage scheme reflects the EBA's recent Report on the Cum-Ex dividend arbitrage controversy.
- AML/CFT information and data will be specifically called out as information that credit institution risk and nominations committees should have access to when performing their respective roles.
- Boards will also be required to consider environmental, social and governance risks when setting, approving and overseeing business strategy, risk strategy, distributions of capital, liquidity targets, remuneration policy, suitability assessments, culture and values, reporting and compliance.
- Boards will need to have policies in place to prevent discrimination of staff based on gender, race, colour, ethnic or social origin, genetic features, religion, belief, property, birth, disability, age or sexual orientation. Measures should also be implemented to ensure equal opportunities for all genders and to improve the representation of women at management level.
- Outsourcing provisions will be removed as these have been overtaken by separate EBA Guidelines on Outsourcing.
- Conflicts of interest provisions will be amended to include a positive requirement to assess and manage actual or potential conflicts. Decision making in respect of identified conflicts should be documented including how any conflict and related risk have been mitigated or remedied.
The revised EBA Guidelines also contain proposed amended provisions regarding board member and related party loans and transactions (RPL). A RPL framework will be needed to ensure internal assessment procedures, pre-loan risk assessments, appropriate limits and approval processes, arm's length transactions and sufficient oversight.
The RPL provisions are called out as a specific source of actual or potential conflicts of interests requiring appropriate management. Irish credit institutions already comply with the Central Bank's Related Party Lending Code, which may require amendment in light of the finalised EBA Guidelines.
Interested parties are invited to respond to nine questions relating to the proposed changes, relating to the clarity and appropriateness of the amendments.
Submissions must be sent by 31 October 2020.
For more information contact Dario Dagostino, Kevin Allen and Patrick Brandt, Financial Regulation Partners or Sinéad Prunty, Knowledge Lawyer or any member of the Financial Regulation team.
Date published: 16 September 2020