Response to eBA launches consultation to revise its Guidelines on internal governance
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Para 19 point m – principle of proportionality
It should be clarified that the references to ‘large institution’ and ‘small and non-complex credit institution’ are based on their definition in Article 4 (1) (146) CRR II and Article 4 (1) (145) CRR II respectively.
EBA goes beyond its mandate when establishing further requirements (e.g. complex framework, limit and approval requirements, voting prohibition, disclosure to shareholders) and extending the rules to “other transactions”. A potential reference of EBA in the Guidelines to the legal basis of Article 74(1) and (3) CRD according to which institutions shall have robust governance arrangements cannot justify every single exceedance of a legally limited mandate.
Moreover, listed banks must adhere to complex rules relating to approval and disclosure of related party transactions based on national law implementing Article 9c SRD II (Directive [EU] 2017/828 as regards the encouragement of long-term shareholder engagement). According to SRD only material related party transactions are subject to approval and disclosure requirements and the SRD provides for several exemptions (e.g. for subsidiaries). Further, the definition of “related party” in Article 88(1) CRD V differs from the definition in Article 9c SRD, in particular by including commercial entities, in which a member of the management body or his or her close family member has a qualifying holding of 10% or more or holds a senior management position.
The provisions for loans and other transaction with members of the management body and their related parties in the EBA draft are stricter than the rules provided for in SRD (see comments to each point below). If the concept for related party transactions provided for in SRD is regarded as appropriate for listed companies, which are subject to very strict rules providing adequate protection of minority shareholders, it is excessive that the draft EBA GL require even stricter limit, framework and approval requirements for all credit institutions without any legal basis in Article 88 CRD V.
Moreover, based on the draft Consultation Paper listed credit institutions would be subject to two different and complex regimes for related party transactions, which would result in a complex and confusing governance and unreasonable administrative burden and costs.
As a general remark, the entire section 11 is in our opinion missing clarity and does not state what the concrete documentation requirements are relating to loans to management body members and related parties. For the sake of clarity, section 11 should contain an introductory part or provision that specifies clearly what a framework needs to contain: for example, a decision-making process (including approvals), internal procedures, policies.
In the current wording, particularly the terms “framework”, “decision”, “procedure” are used frequently in different contexts (mainly para. 107, 108 and 109) and it does not explain clearly which subject of section 11 requires a decision and by which body the decision needs to be taken. The questions that should be clarified in this context are from the perspective of a 2-tier board system:
(i) What has to be approved by the Management Board, what has to be approved by the Supervisory Board and what should be approved by both the Management Board and the Supervisory Board?
(ii) How to deal with material and non-material loans (including an indication to the definition of materiality and non-materiality as mentioned below and the approval level)? How to deal with loans that have not been concluded under standard market conditions or normal market terms.
It should be further specified that only loans that are classified as material and have been concluded under better conditions than standard conditions are subject to increased documentation, control and approval requirements (for example, Supervisory Board in case of a 2-Tier board system); it is not justified and reasonable from an administrative point of view to apply the same requirements to non-material loans and loans that have been concluded under less favorable conditions since they do not represent a conflict of interest (para. 108, 109, but also 110, 112 and 113 should be amended in this respect).
Furthermore, reference to material and non-material loans and transactions is made throughout section 11 without specifying what is material or non-material (the threshold of EUR 200.000 mentioned in para. 112 g. and also mentioned in the ECB Guide on Suitability Assessments could be seen as materiality threshold, however this is not clearly stated in the GL). Since a materiality threshold could be already in place in the national law of Member States in relation to loans to the management body members, the GL could give the Member States the option to use/set the materiality/non-materiality differentiation according to their national law.
Paragraph 107
Article 88 CRD V does not require any framework, limit or approval procedure for all transactions. It only provides documentation and disclosure obligations with respect to loans (and not with regard to other transactions).
Further, the CRD does not stipulate that transactions with members of the management body and their related parties are in any way restricted by “limits”. Such limits are neither required nor reasonable for properly managing conflicts of interest (Article 9c SRD does not refer to any limit rules either).
In particular the “limit” and the “framework” requirements are excessive for transactions with commercial entities (corporate banking), which are considered as related parties based on the very broad definition of “related party” in Article 88 (1) CRD (incl. for example companies where a close family member holds a senior management position or has a share of 10%).
A comprehensive framework of limits and special approval requirements would result in disproportionate administrative efforts and costs without a legal basis.
CRD defines commercial entities, in which a member of a management body holds a senior management or management body position, as related parties. Consequently, if a shareholder of the credit institution is represented in the supervisory function of the management body by its managing director or a person with a senior management position, the shareholding company could be regarded as “related party” of the credit institution in the meaning of Article 88 CRD V. The same applies, if a management board member holds a supervisory board function in a subsidiary. It seems excessive and inappropriate to apply a complex framework and limit rules to intra-group transactions (especially for transactions with the sole shareholder or with subsidiaries).
Consequently, the EBA Guidelines should clarify, that the rules for loans and other transactions do not apply to shareholders of the credit institution and the companies on which the credit institution exerts control or significant influence. This approach would be in line with point 116 of the draft GL that states that credit institutions may only “consider” to apply the rules also to qualified shareholders and subsidiaries.
Paragraph 108
Article 88(1) CRD V does not provide for an approval requirement for material loans or transactions and a prohibition to vote. Consequently, only the respective Members State´s company law and private law determines the approval requirements and voting restrictions.
The EU law requires the approval of related party transactions and provides for voting prohibitions only for listed companies based on Article 9c SRD II. The SRD allows Member States to provide for exemptions (e.g. for intra-group transactions and voting of the shareholder). If such concept is regarded as appropriate for listed companies, which are subject to very strict rules providing adequate protection of minority shareholders, the even stricter rules and the general prohibition to vote provided for in the draft EBA GL (without any legal basis in the CRD) seem excessive.
It is unclear when a person is considered as “personally concerned by a loan to or transaction with a member of the management body or their related parties”. It should be clarified that the fact that a loan is granted to a commercial entity, which is a related party to a management body member does not automatically result in the qualification of that management body member as “personally concerned” (in its personal interests).
Para 109
It would be difficult and burdensome to ascertain, define and document for each transaction the compliance with ”standard conditions” and “normal market terms”, especially if there is no clear market value available. Article 9c SRD II requires the assessment of a transaction as based on “market terms” and in “ordinary course of business” only for material transactions.
Taking into consideration the broad definition of related parties, which might result in a large number of related commercial entities, the obligation to monitor and evaluate that all transactions have been concluded on standard conditions and on normal market terms may result in a very high administrative burden and costs for the credit institution. Hence, at least non-material transactions should be excluded here.
Paragraph 112 f
Information that the loan is on arm´s length is sufficient for documentation purposes, it is in our opinion not necessary to refer here to “conditions available to all staff”.
The requirements under para. 112 g i. and ii. extend illegitimately - as mentioned above at the beginning of our statement to section 11 – the scope of Art. 88 (1) CRD since they include into the calculation of the requested figures also exposures (exposures definitely go beyond loans). In addition, it is not sufficiently clear which types of positions shall be subsumed under aggregated exposures. This should be avoided, as it would lead to legal and practical uncertainties and we therefore request to completely remove para.112 g.
Paragraph 114
Considering the increased documentation requirements the present GL intends to impose and in some cases the complexity of loans to management body members and their related parties it will be extremely difficult to make available all loans to the competent authorities without undue delay. We therefore recommend to reformulate the paragraph, in order to allow institutions to have more flexibility when facing such information requests.
“Credit institutions should ensure that the documentation of all loans to members of the management body and their related parties is complete and updated and the institution should be able to make available to competent authorities the complete documentation of a specific member or his/her related parties in an appropriate form upon request.”
Paragraph 115
Pursuant to this provision credit institutions should make available annually to their shareholders or owners appropriate aggregated information on loans and other transactions with members of the management body and their related parties.
Article 88(1) CRD V does not provide a legal basis for any disclosure obligations to shareholders. Also according to SRD II, even listed banks (which are generally subject to stricter disclosure requirements to their shareholders to protect the minority shareholders) must only disclose material related party transactions (if not exempted according to SRD) to their shareholders, but not any other transactions
Does EBA aim for the integration of the AML/CTF check in the general risk management? If so, what effects would this have on the responsibilities within the credit institutions? In any case, the results of the AML/CTF check cannot have any impact on regulatory requirements, especially not on capital requirements; a negative result of the AML/CTF check can only result in the rejection or increased monitoring of the business relationship.
Additional comments:
Paragraph 143
Which "other" compliance functions are meant (Austrian Securities Supervision Act and/or the Compliance Function)?
Paragraph 166
Are the control functions supposed to cover new/additional tasks (see also comments with respect to 140 and 149) or shall AML/CTF aspects be integrated in the respective department.
Definitions
On one side, the term “relevant institutions” has been introduced in the Fit & Proper GL and makes difficult to further differentiate between the categories of institutions that are now in scope. There are overall 6 categories: “institutions”, “CRD-institutions”, “relevant institutions”, “significant CRD-institutions”, “listed relevant institutions and listed institutions”, “consolidating credit institutions”. On the other side, the Internal Governance GL operate with the terms “significant credit institutions” and “listed CRD credit institutions”. We recommend to review the definitions and operate with one set of definitions for both GLs.
Question 2: Point (d) has been added, throughout the Guidelines references to money laundering and terrorism financing and the institutions obligations have been added, are those references sufficiently clear?
The expectations regarding the internal governance framework with respect to AML/CTF should be questioned. The EBA should clarify if the intention is to include references to existing AML/CTF guidelines/functions or if additional frameworks/documents in this regard are expected.Para 19 point m – principle of proportionality
It should be clarified that the references to ‘large institution’ and ‘small and non-complex credit institution’ are based on their definition in Article 4 (1) (146) CRR II and Article 4 (1) (145) CRR II respectively.
Question 7: Section 11 has been added to provide guidelines on loans and transactions with members of the management body and their related parties, reflecting changes to CRD. Is the section appropriate and sufficiently clear?
In our view, the extension of requirements to other transactions goes beyond the EBA´s mandate, defined in Art. 88 (1) CRD V, which refers only to loans and does not mention “other transactions”. Article 88 (1) CRD V only provides for a documentation and a disclosure requirement with respect to data on loans to members of the management body and their related parties (as defined therein in point a and b). Such loans shall be properly documented and made available to competent authorities upon request.EBA goes beyond its mandate when establishing further requirements (e.g. complex framework, limit and approval requirements, voting prohibition, disclosure to shareholders) and extending the rules to “other transactions”. A potential reference of EBA in the Guidelines to the legal basis of Article 74(1) and (3) CRD according to which institutions shall have robust governance arrangements cannot justify every single exceedance of a legally limited mandate.
Moreover, listed banks must adhere to complex rules relating to approval and disclosure of related party transactions based on national law implementing Article 9c SRD II (Directive [EU] 2017/828 as regards the encouragement of long-term shareholder engagement). According to SRD only material related party transactions are subject to approval and disclosure requirements and the SRD provides for several exemptions (e.g. for subsidiaries). Further, the definition of “related party” in Article 88(1) CRD V differs from the definition in Article 9c SRD, in particular by including commercial entities, in which a member of the management body or his or her close family member has a qualifying holding of 10% or more or holds a senior management position.
The provisions for loans and other transaction with members of the management body and their related parties in the EBA draft are stricter than the rules provided for in SRD (see comments to each point below). If the concept for related party transactions provided for in SRD is regarded as appropriate for listed companies, which are subject to very strict rules providing adequate protection of minority shareholders, it is excessive that the draft EBA GL require even stricter limit, framework and approval requirements for all credit institutions without any legal basis in Article 88 CRD V.
Moreover, based on the draft Consultation Paper listed credit institutions would be subject to two different and complex regimes for related party transactions, which would result in a complex and confusing governance and unreasonable administrative burden and costs.
As a general remark, the entire section 11 is in our opinion missing clarity and does not state what the concrete documentation requirements are relating to loans to management body members and related parties. For the sake of clarity, section 11 should contain an introductory part or provision that specifies clearly what a framework needs to contain: for example, a decision-making process (including approvals), internal procedures, policies.
In the current wording, particularly the terms “framework”, “decision”, “procedure” are used frequently in different contexts (mainly para. 107, 108 and 109) and it does not explain clearly which subject of section 11 requires a decision and by which body the decision needs to be taken. The questions that should be clarified in this context are from the perspective of a 2-tier board system:
(i) What has to be approved by the Management Board, what has to be approved by the Supervisory Board and what should be approved by both the Management Board and the Supervisory Board?
(ii) How to deal with material and non-material loans (including an indication to the definition of materiality and non-materiality as mentioned below and the approval level)? How to deal with loans that have not been concluded under standard market conditions or normal market terms.
It should be further specified that only loans that are classified as material and have been concluded under better conditions than standard conditions are subject to increased documentation, control and approval requirements (for example, Supervisory Board in case of a 2-Tier board system); it is not justified and reasonable from an administrative point of view to apply the same requirements to non-material loans and loans that have been concluded under less favorable conditions since they do not represent a conflict of interest (para. 108, 109, but also 110, 112 and 113 should be amended in this respect).
Furthermore, reference to material and non-material loans and transactions is made throughout section 11 without specifying what is material or non-material (the threshold of EUR 200.000 mentioned in para. 112 g. and also mentioned in the ECB Guide on Suitability Assessments could be seen as materiality threshold, however this is not clearly stated in the GL). Since a materiality threshold could be already in place in the national law of Member States in relation to loans to the management body members, the GL could give the Member States the option to use/set the materiality/non-materiality differentiation according to their national law.
Paragraph 107
Article 88 CRD V does not require any framework, limit or approval procedure for all transactions. It only provides documentation and disclosure obligations with respect to loans (and not with regard to other transactions).
Further, the CRD does not stipulate that transactions with members of the management body and their related parties are in any way restricted by “limits”. Such limits are neither required nor reasonable for properly managing conflicts of interest (Article 9c SRD does not refer to any limit rules either).
In particular the “limit” and the “framework” requirements are excessive for transactions with commercial entities (corporate banking), which are considered as related parties based on the very broad definition of “related party” in Article 88 (1) CRD (incl. for example companies where a close family member holds a senior management position or has a share of 10%).
A comprehensive framework of limits and special approval requirements would result in disproportionate administrative efforts and costs without a legal basis.
CRD defines commercial entities, in which a member of a management body holds a senior management or management body position, as related parties. Consequently, if a shareholder of the credit institution is represented in the supervisory function of the management body by its managing director or a person with a senior management position, the shareholding company could be regarded as “related party” of the credit institution in the meaning of Article 88 CRD V. The same applies, if a management board member holds a supervisory board function in a subsidiary. It seems excessive and inappropriate to apply a complex framework and limit rules to intra-group transactions (especially for transactions with the sole shareholder or with subsidiaries).
Consequently, the EBA Guidelines should clarify, that the rules for loans and other transactions do not apply to shareholders of the credit institution and the companies on which the credit institution exerts control or significant influence. This approach would be in line with point 116 of the draft GL that states that credit institutions may only “consider” to apply the rules also to qualified shareholders and subsidiaries.
Paragraph 108
Article 88(1) CRD V does not provide for an approval requirement for material loans or transactions and a prohibition to vote. Consequently, only the respective Members State´s company law and private law determines the approval requirements and voting restrictions.
The EU law requires the approval of related party transactions and provides for voting prohibitions only for listed companies based on Article 9c SRD II. The SRD allows Member States to provide for exemptions (e.g. for intra-group transactions and voting of the shareholder). If such concept is regarded as appropriate for listed companies, which are subject to very strict rules providing adequate protection of minority shareholders, the even stricter rules and the general prohibition to vote provided for in the draft EBA GL (without any legal basis in the CRD) seem excessive.
It is unclear when a person is considered as “personally concerned by a loan to or transaction with a member of the management body or their related parties”. It should be clarified that the fact that a loan is granted to a commercial entity, which is a related party to a management body member does not automatically result in the qualification of that management body member as “personally concerned” (in its personal interests).
Para 109
It would be difficult and burdensome to ascertain, define and document for each transaction the compliance with ”standard conditions” and “normal market terms”, especially if there is no clear market value available. Article 9c SRD II requires the assessment of a transaction as based on “market terms” and in “ordinary course of business” only for material transactions.
Taking into consideration the broad definition of related parties, which might result in a large number of related commercial entities, the obligation to monitor and evaluate that all transactions have been concluded on standard conditions and on normal market terms may result in a very high administrative burden and costs for the credit institution. Hence, at least non-material transactions should be excluded here.
Paragraph 112 f
Information that the loan is on arm´s length is sufficient for documentation purposes, it is in our opinion not necessary to refer here to “conditions available to all staff”.
The requirements under para. 112 g i. and ii. extend illegitimately - as mentioned above at the beginning of our statement to section 11 – the scope of Art. 88 (1) CRD since they include into the calculation of the requested figures also exposures (exposures definitely go beyond loans). In addition, it is not sufficiently clear which types of positions shall be subsumed under aggregated exposures. This should be avoided, as it would lead to legal and practical uncertainties and we therefore request to completely remove para.112 g.
Paragraph 114
Considering the increased documentation requirements the present GL intends to impose and in some cases the complexity of loans to management body members and their related parties it will be extremely difficult to make available all loans to the competent authorities without undue delay. We therefore recommend to reformulate the paragraph, in order to allow institutions to have more flexibility when facing such information requests.
“Credit institutions should ensure that the documentation of all loans to members of the management body and their related parties is complete and updated and the institution should be able to make available to competent authorities the complete documentation of a specific member or his/her related parties in an appropriate form upon request.”
Paragraph 115
Pursuant to this provision credit institutions should make available annually to their shareholders or owners appropriate aggregated information on loans and other transactions with members of the management body and their related parties.
Article 88(1) CRD V does not provide a legal basis for any disclosure obligations to shareholders. Also according to SRD II, even listed banks (which are generally subject to stricter disclosure requirements to their shareholders to protect the minority shareholders) must only disclose material related party transactions (if not exempted according to SRD) to their shareholders, but not any other transactions
Question 9: Paragraph 140 has been added, is it sufficiently clear?
Paragraphs 140 and 149Does EBA aim for the integration of the AML/CTF check in the general risk management? If so, what effects would this have on the responsibilities within the credit institutions? In any case, the results of the AML/CTF check cannot have any impact on regulatory requirements, especially not on capital requirements; a negative result of the AML/CTF check can only result in the rejection or increased monitoring of the business relationship.
Additional comments:
Paragraph 143
Which "other" compliance functions are meant (Austrian Securities Supervision Act and/or the Compliance Function)?
Paragraph 166
Are the control functions supposed to cover new/additional tasks (see also comments with respect to 140 and 149) or shall AML/CTF aspects be integrated in the respective department.
Definitions
On one side, the term “relevant institutions” has been introduced in the Fit & Proper GL and makes difficult to further differentiate between the categories of institutions that are now in scope. There are overall 6 categories: “institutions”, “CRD-institutions”, “relevant institutions”, “significant CRD-institutions”, “listed relevant institutions and listed institutions”, “consolidating credit institutions”. On the other side, the Internal Governance GL operate with the terms “significant credit institutions” and “listed CRD credit institutions”. We recommend to review the definitions and operate with one set of definitions for both GLs.