In December 2020 the CSSF published circular 20/759 (an update of circular 12/552) on central administration, internal governance and risk management.
It transposes (amongst others) EBA Guidelines 2017/11 on internal governance and joint EBA and ESMA Guidelines 2017/12 on suitability assessment of the members of the management body and key function holders.
The new version of the circular entered into force on 1 January 2021 and KPMG hosted a webinar one week later to raise the market’s awareness as to the main changes.
Following fruitful debates and discussions with our clients, we identified some areas where banks are potentially struggling.
The circular is now also applicable to financial and mixed financial holding companies. Regulatory requirements differ depending on whether an institution is significant or not. Eight institutions are currently directly under ECB supervision or considered locally as significant (G-SIIs and O-SIIs).
What do the changes mean?
The circular stipulates that the objectives and responsibilities of non-executive board members should be documented in written mandates and that the minutes of Board meetings should be detailed enough in order to identify each standpoint when controversial or risk-related topics are discussed. It also states that anyone should be able to get a full picture of the discussion purely based on what has been written in the minutes.
This could have a significant impact on board room behavior, and the market reported to us that it may in fact be counterproductive and end up leading to less controversial discussions in the board room. Board members are collectively responsible, and too much focus on individual responsibilities and opinions might not promote the right atmosphere and mindset. Not feeling as free or confident to speak up, express opinions, debate or challenge other points of view could essentially prevent the best decision being reached.
What’s more, minutes may be referred to (in a different context) months or even years after a meeting and could potentially lead to misinterpretation or even misjudgment.
The circular reinforces the importance of embedding risk considerations in all processes:
- when defining the strategy
- when meeting customer expectations
- when reporting the past and planning the future.
Risk culture should be strengthened at the first line of defense and adequate bridges should be built: from strategy to funding and liquidity planning, a sound and efficient control framework is needed.
And let’s not forget the ubiquitous three: E, S and G. It is crucial for every business model to consider ESG strategy and potential risk derived.
How can KPMG help you?
We can assess your institution’s readiness and help you achieve full compliance in the most efficient way! And we’re ready to address important topics in your board room with presentations or open discussions.