2020 revision of CSSF Circular 12/552 on  central administration, internal governance and risk management

News

2020 revision of CSSF Circular 12/552 on central administration, internal governance and risk management

10 December 2020

Regulatory News Alert

Context and objectives

On 7 December 2020, the Commission de Surveillance du Secteur Financier (CSSF) released the long awaited revision of CSSF Circular 12/552 on central administration, internal governance and risk management.

The CSSF decided to distinguish regulatory requirements applicable to investment firms on one hand through the Circular CSSF 20/758 and credit institutions and professionals performing lending operations on the other hand through Circular CSSF 20/759.

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The reason behind this split is that the CSSF considers that the regulatory framework applicable to credit institutions is increasingly diverging from the one applicable to investment firms. This is notably evidenced by the forthcoming application of Investment Firm Directive and Regulation (IFR/IFD) that will introduce a dedicated prudential regime for investment firms, departing for the Capital Requirements Directive and Regulation (CRR/CRD) framework.

Maintaining a unique Circular covering different entities and different areas of activity becomes difficult to manage for both the CSSF and supervised entities. The new Circular CSSF 20/758 introduces new and adapted requirements for investment firms, under the principle of proportionality.

In addition, the CSSF published the prudential procedure for the appointment of directors, members of the authorized management and key function holders in investment firms.

Circular CSSF 20/759 applicable to credit institutions and professionals performing lending operations

This Circular implements six EBA Guidelines updating the governance framework applicable to credit institutions:

  • EBA Guidelines on internal governance (EBA/GL/2017/11)
  • Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders (EBA/GL/2017/12)
  • EBA Guidelines on the application of the new definition of default (EBA/GL/2016/07)
  • EBA Guidelines on specification of types of exposures to be associated with high risk (EBA/GL/2019/01)
  • EBA Guidelines on the management of interest rate risk arising from non-trading book activities (EBA/GL/2018/02)
  • EBA Guidelines on corrections to modified duration for debt instruments (EBA/GL/2016/09)

These alignments with EBA Guidelines have led to adjustment in terminology, notably with the introduction of the concepts of ‘management body in its management function’ and ‘management body in its supervisory function’.

Key changes introduced by the Circular relate to:

  • The extension of the scope of application to financial holding companies and mixed financial holding companies;
  • A more precise articulation of the concept of proportionality
  • The reinforcement of the concept of Culture of Compliance and Risk
  • The introduction of Environmental, Social, and Governance (ESG) factors to ensure the viability of the business model
  • The introduction of the concept of risk appetite to define business orientations and capacities
  • The strengthening of the management body in its supervisory function (including specialised committees) of which enhanced provisions on diversity and independence;
  • The addition of certain precisions regarding internal control functions
  • The redefinition of the concept of the “new Product Approval Process”
  • The repealing of requirements applicable to credit risk (in line with principles disclosed in the loan origination EBA guidelines) including credit approval process, forbearance, loan to value prudent valuation of collateral and non-performing exposures.
  • The repealing of the important AML/FT inherent risk when acting as private bankers; and
  • A new chapter dedicated to the risks arising from the activity of depositary bank.

Circular CSSF 20/758 applicable to investment firms

This new Circular repeals Circular CSSF 12/552 and introduces a new governance framework specifically applicable to investment firms. It is jointly published with Circular CSSF 20/757, highlighting the main changes between Circular CSSF 12/552 and Circular CSSF 20/758.

Similarly to the provisions applicable to credit institutions, Circular CSSF 20/758 implements in Luxembourg four EBA Guidelines updating the governance framework in force of investment firms:

  • EBA Guidelines on internal governance (EBA/GL/2017/11)
  • Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders (EBA/GL/2017/12)
  • EBA Guidelines on the management of interest rate risk arising from non-trading book activities (EBA/GL/2018/02)
  • EBA Guidelines on corrections to modified duration for debt instruments (EBA/GL/2016/09)

The key changes presented in the Circular discuss the same areas as the one introduced for credit institutions with the exception of the provisions dedicated to depositary banks.

Entry into force

Both Circulars will come into force from 1 January 2021.

What does this mean for my institution?

Internal governance and risk management practices are among the central areas of scrutiny of the CSSF and both credit institutions and investment firms need to ensure proper governance arrangement are in place in their organizations.

Incorporating multiple key priorities of the EU regulators such as diversity, ESG, proportionality and enhanced risk management practices, these Circulars play a central role in the way credit institutions and investment firms should design their organizational arrangements and strategic objectives.

To adapt their institution to the latest European guidelines, institutions concerned will have to undertake an assessment of their organization, evidence potential gaps and propose review of current processes, procedures and potentially reorganize their structure.

How can Deloitte help?

Deloitte’s advisory specialists and dedicated services can help you design and implement your business strategy in light of the evolution of regulatory frameworks and market trends.

With our Regulatory Watch Kaleidoscope service, Deloitte can also help you stay ahead of the regulatory curve to better manage and plan upcoming regulations.

Contacts

Subject matter specialists

Pascal Martino
Partner – Banking Leader
Tel : +352 45145 2119
pamartino@deloitte.lu

Laurent Berliner 
Partner - EMEA FSI Risk Advisory Leader
Tel: +352 45145 2328
lberliner@deloitte.lu

Jean-Philippe Peters
Partner – Risk Advisory Leader
Tel : +352 45145 2276
jppeters@deloitte.lu

Bertrand Parfait 
Partner - Risk Advisory 
Tel: +352 45145 2940 
bparfait@deloitte.lu


Regulatory Watch Kaleidoscope service

Simon Ramos
Partner – IM Advisory & Consulting 
Leader
Tel: +352 45145 2702
siramos@deloitte.lu

Benoit Sauvage
Director – Risk Advisory
Tel : +352 45145 4220
bsauvage@deloitte.lu

Marijana Vuksic
Senior Manager – Risk Advisory
Tel : +352 45145 2311
mvuksic@deloitte.lu

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