The European Banking Authority (‘EBA’) has issued a draft consultation paper to revise the Guidelines on Internal Governance (‘EBA-GL-2017-11’) to capture the amendment of the fifth Capital Requirements Directive[1] (‘CRD V’). The revised Guidelines also take into account the Investment Firms Directive[2] (‘IFD’) specifically capturing the sound and effective governance arrangements.
The consultation paper will run to 31 October 2020 with the amended guidelines proposed to enter into force on 26 June 2021.
The proposed amendments further tailor the scope of application of the revised guidelines to credit institutions by recognising the EBA intention of promoting consistent application of the internal governance requirements.
The five main changes identified are: 1. Loans and other transactions with members of the management body and their related parties; 2. Outsourcing Policy; 3. Corporate values and code of conduct; 4. Anti-Money Laundering as a new focus area of the EBA; and 5. Credit Institutions vs MiFID firms.
What is covered under the proposed amendments?
In the section below, we outline the five key impacts of this draft consultation paper. In the context of the full Guidelines on internal governance, the five key impacts provide increasing prescriptions for investment firms.
The revised Guidelines reinforce rules pertaining to loans from credit institutions or affiliates to members of the management body and any related parties. The loans may present actual or potential conflicts of interest and so the Guidelines outline procedures on the management of these conflicts.
A new prescriptive framework is introduced with regards to credit institutions documenting the data on loans; additionally, they should provide annual disclosures to their shareholders or owners via appropriate aggregated information on these loans and other transactions.
The existing Outsourcing Policy prescriptions under the current Guidelines on Internal Governance have been removed due to the existing guidance in this area. The EBA’s existing Outsourcing Policy is covered under the broader EBA Guidelines on Outsourcing Arrangements (EBA/GL/2019/02).
The Code of Conduct now also requires all credit institutions to take the necessary steps to ensure the avoidance of any discrimination in the workplace. In order to do so, credit institutions are required to revise, where applicable, their policies to take into account the above.
Furthermore, it is expected that the implementation of gender-neutral opportunities would promote an improvement in the representation of the underrepresented gender in management positions for credit institutions.
Anti-Money Laundering (‘AML’) and terrorist financing (‘Financial Crime’) have been one of the focus areas of the EBA in recent years. In order to promote an EU wide approach to AML and Financial Crime, these topics are now captured in the revised Guidelines to monitor and maintain stability and integrity in the financial system. Credit institutions will be expected to demonstrate sound internal governance arrangements and maintain adequate risk management frameworks to comply with the revised changes.
Furthermore, a member of the management body will be expected to assume responsibility for ensuring compliance with the proposed AML governance requirements.
The revised Guidelines modify their scope of application for investment firms; they solely apply to investment firms that meet the criteria prescribed under Article 1(2) and (5) of the Investment Firms Regulation[3] (‘IFR’) and are no longer applicable to all investment firms. Effectively, investment firms providing specific MiFID activities (i.e. dealing on own account and underwriting or placing on firm commitment) and whose consolidated assets are equal to or exceeds EUR15 billion, as outlined in Article 1(2) and (5) of the IFR, will be treated as credit institutions for the purposes of these guidelines.
The EBA, in consultation with ESMA, will issue guidelines on the application of the governance arrangements for investment firms not meeting the above thresholds.
How Grant Thornton Can Help
Grant Thornton’s Financial Services Risk and Advisory teams have supported a number of institutions with understanding, preparing for and implementing the prescriptions regarding internal governance in the last decade. In particular, our prudential risk experts have extensive knowledge of the relevant legislation and guidance and the challenges these pose to your institutions.
Our experts can help your institution assess its regulatory requirements arising from the new proposed amendments to the revised Guidelines and advise on methods to ensure full compliance balanced with your business needs.
[1] DIRECTIVE (EU) 2019/878 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures
[2] DIRECTIVE (EU) 2019/2034 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU
[3] Regulation (EU) 2019/2033 of the European Parliament and f the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014
