Dimitrios Goranitis, FSI Risk & Regulatory Advisory Partner, Deloitte Central Europe
EBA published 3 new revised guidelines that impact the governance of the credit institutions. The revised guidelines take into account the amendments introduced by the revised Capital Requirements Directive (CRD V) and the Investment Firms Directive (IFD). In particular, for the EBA Guidelines on internal governance, the main updates refer to gender diversity, money laundering, financing terrorist risk and the management of conflicts of interest, including in the context of loans and other transactions with members of the management body and their related parties. Regarding the EBA and ESMA Guidelines on the assessment of the suitability of members of the management body and key function holders, the main updates refer to the effect of CRD V and IFD on the assessment of suitability of members of the management body, in particular with regard to money laundering and financing terrorism risks and gender diversity.
As for the EBA Guidelines on sound remuneration policies, the update refers to the CRD V amendments in relation to the requirement that remuneration policies should be gender neutral. The final Guidelines also consider supervisory practices and clarify some aspects of retention bonuses and severance pays. The revised guidelines will apply from 31 December 2021. Highlights from the EBA Guidelines on Internal Governance The guidelines reinforce the governance requirements for institutions and, in particular, stresses the responsibility of the management body for sound governance arrangements, the importance of a strong supervisory function that challenges management decision-making and the need to establish and implement a sound risk strategy, risk appetite and risk management framework.
The guidelines also specify further requirements aimed at ensuring the sound management of risks across the three lines of defense and, in particular, set out detailed elements for the second line of defense (the independent risk management and compliance functions) and the third line of defense (the internal audit function).
The revised guidelines are based on the earlier guidelines on internal governance but bring forward additional elements that aim to foster a sound risk culture implemented by the management body, to strengthen the management body’s oversight of the institution’s activities and to strengthen the risk management frameworks of institutions, for example by including the aspect of AML/TF risk factors. The revised Guidelines clarify that identifying, managing and mitigating money laundering and financing of terrorism risk is part of sound internal governance arrangements and credit institutions’ risk management framework.
These Guidelines further specify and reinforce the framework regarding loans to members of the management body and their related parties. Those loans may constitute a specific source of actual or potential conflict of interest and, therefore, specific provisions have been explicitly included in the Directive CRD. In the same way, other transactions with members of the management body and their related parties have the potential to create conflicts of interest and, therefore, the EBA is providing guidance on how to properly manage them.
Finally, in line with the requirement to have a gender-neutral remuneration policy, the revised Guidelines provide new guidance on the code of conduct to ensure that credit institutions take all necessary measures to avoid any form of discrimination and guarantee equal opportunities to staff of all genders. In addition, institutions should monitor the gender pay-gap. Highlights from the joint EBA and ESMA revised guidelines on fit and proper requirements In the context of combatting money laundering and terrorist financing, the final joint Guidelines clarify, in line with CRD V, that assessing the knowledge, experience and skill requirements include identifying, managing and mitigating money laundering and financing of terrorism risks, as these aspects are part of the assessments of the suitability of members of the management body and key function holders. In addition, a gender balanced composition of the management body is of particular importance.
Institutions should respect the principle of equal opportunities for any gender and take measures to improve a more gender balanced composition of staff in management positions so as to ensure a more gender balanced pool of candidates for positions within the management body. The recovery and resolution framework introduced by the BRRD is taken into account within the revised EBA and ESMA joint guidelines. As part of early intervention measures and during resolution, the suitability of newly appointed members of the management body and the management body collectively are relevant and require an assessment.
The Guidelines provide further details on how the exchange of information between resolution authorities and competent authorities should work. Highlights from the EBA revised Guidelines on sound remuneration policies Institutions need to apply the principle of equal pay for male and female workers for equal work in a consistent manner. In this context, the final revised Guidelines specify further that institutions should implement a gender-neutral remuneration policy. All institutions are also required to apply sound and gender-neutral remuneration policies to all staff.
Additional guidance is provided on the application of waivers based on institutions’ total balance sheet and for staff with a low variable remuneration that have been introduced with CRD V regarding the requirements to defer and pay out in instruments a part of the variable remuneration of identified staff. The final Guidelines also clarify how the remuneration framework applies on a consolidated basis to financial institutions that are subject to a specific remuneration framework (for example, firms subject to the Investment Firms Directive (IFD), the Undertakings for Collective Investment in Transferable Securities Directive (UCITS), or the Alternative Investment Fund Managers Directive (AIFMD)). Finally, the sections on severance payments and retention bonuses have been revised based on supervisory experience regarding cases where such elements have been used by institutions to circumvent requirements regarding the link to performance or the maximum ratio.