EBA reviews its guidelines on internal governance and on the suitability of the management body

Are you ready for an enhanced assessment of governance under SREP?

Banking alert | 01 November 2016


Post-financial crisis, global banking supervisors have placed emphasis on the importance of internal governance to ensure sound risk management for business model sustainability. In fact, internal governance is one of the top priorities of the ECB’s Single Supervisory Mechanism and one of the key elements of the Supervisory Review and Evaluation Process (SREP).

The EBA has launched a consultation to revise the Guidelines on Internal Governance, which were originally published in 2011. Furthermore, the EBA and ESMA have jointly launched a consultation to revise the Guidelines on the Assessment of the Suitability of Members of Management Body and Key Function Holders.

Emphasis on enhancing information flow

The revised Guidelines on Internal Governance emphasise the importance of the interaction between the management body in its supervisory function and management function. Both functions should provide each other with sufficient information to allow them to perform their respective roles.

Focus on role of risk committee

The role of the risk committee is somewhat enhanced in the revised guidelines. The risk committee is responsible for overseeing the implementation of strategies for capital and liquidity management and ensuring business model execution in line with approved risk appetite. The risk committee has a key role in advising and supporting the management body in its supervisory function on the monitoring of risk management. Furthermore, the risk committee should assess the risks associated with offered financial products and services, as evidenced in the ICAAP and ILAAP, and examine the alignment with the prices assigned and profits gained from those products and services.

Avoiding complex structures

Following the ‘Panama events’ the revised guidelines accentuate that institutions should avoid setting up complex and potentially non-transparent structures. Specifically, institutions should consider at least the extent to which the jurisdiction in which the structure will be set up complies effectively with international standards on tax transparency, anti-money laundering and countering the financing of terrorism, as well as the extent to which the structure could be used to hide the entity of the ultimate beneficial owner.

Assessment of suitability of board members

The revised guidelines jointly issued by EBA and ESMA align existing guidelines on suitability of members of the management body with the new requirements introduced under CRD and MiFID II.

Institutions should ensure that members of the management body are suitable at all times and commit sufficient time. In order to conduct the collective suitability assessment, institutions may use the suitability matrix template published by the EBA. This template maps experience of board members to specific requirements around the business model, organisational structure, risk management and overall decision-making. Each requirement in the template is scored for collective suitability and matched to members of the board who bring in most value-added for the specific area.

The outcomes of the collective suitability assessment should be analysed by the institution, and specifically provide input for training needs.

How can we help?

Our SREP Transformation service offering includes a Governance Transformation module which consists of the following:

Gap Analysis on policies and procedures. Our Gap Analysis Tools are used to assess compliance along the 8 governance work-blocks specified in the EBA SREP Methodology

Board evaluation service. In addition to conducting a collective suitability assessment in line with the revised guidelines, our approach incorporates a number of techniques including reviewing board documentation, sitting in board meetings to assess board dynamics, challenging board members through interviews and running case studies.

Board training. We offer training on a range of risk and regulatory topics. Our training menu will be designed based on knowledge gaps identified in the collective suitability assessment as well as any other areas of interest identified by the board.

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