September 2017: Financial Services: EBA Guidelines on Internal Governance under CRD IV

The European Banking Authority (EBA) has published its final Guidelines on Internal Governance under CRD IV. The Guidelines apply as of 30 June 2018 to national regulators, and also to firms on an individual and consolidated basis.

Background

CRD IV requires that firms have robust governance arrangements, including a clear organisational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report risks they are or might be exposed to, adequate internal control mechanisms, including sound administration and accounting procedures, and remuneration policies and practices that are consistent with and promote sound and effective risk management.

CRD IV requires the EBA to issue Guidelines on those arrangements, processes and mechanisms. On 21 December 2015, the EBA published its Guidelines on Sound Remuneration Policies under CRD IV. The new Guidelines must be read in conjunction with the earlier Guidelines.

General Summary

The Guidelines cover a range of issues concerning internal governance, including:

  • role and composition of the management body and committees (including risk and audit);
  • governance framework, including outsourcing policies;
  • risk culture and business conduct, including management of conflicts of interest and reporting of breaches to competent authorities;
  • internal control framework and mechanism, including the risk management, compliance and internal audit functions; and
  • business continuity management.

Impact on Remuneration

The Guidelines do not directly impact remuneration regulation, but do have indirect impact, including:

  • a statement that the management body is responsible for setting, approving and overseeing the implementation of remuneration policy that is in line with CRD IV and the Guidelines on Sound Remuneration Policies under CRD IV;
  • a statement that the management body, in its supervisory function, should appropriately fulfil the duties and role of the remuneration committee where such a committee has not been set up;
  • a statement that the management body, in its supervisory function, should oversee that policies, including the remuneration policy, and accompanying disclosure framework, are implemented consistently;
  • a statement that ‘significant’ firms must establish a remuneration committee (as noted in the earlier Guidelines on Sound Remuneration Policies under CRD IV);
  • a statement that the risk committee should collaborate with the remuneration committee as a result of the impact that the remuneration committee’s activities may have on risk strategy;
  • a statement that risk committees must, without prejudice to the tasks of the remuneration committee, examine whether incentives provided by the remuneration policies and practices take into consideration the firm’s risk, capital and liquidity, and the likelihood and timing of earnings.

Next Steps

The Guidelines will apply as of 30 June 2018 to national regulators, and also to firms on an individual and consolidated basis. Firms will be expected to comply with the guidelines in full from that date, subject to any area of the Guidelines on which the appropriate national regulator informs the EBA that it will take a different approach.

Tapestry Comment

EBA Guidance is useful for firms to understand their expectations and it is expected that national regulators will implement/apply the Guidance to the firms for which they are responsible. However, it is will be interesting to see if the regulators take a different approach on any points, and also how the outcome of Brexit negotiations impact the application of these Guidelines within the UK.

If you have any questions, please do get in touch – we are always delighted to help!

Janet and Matthew

Janet Cooper   Matthew Hunter

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