Corporate governance trends in banks – Perspectives from the CSSF and the ECB about the Luxembourg banking marketILA 2017 Forum for Directors of Luxembourg Credit Institutions
Last October, the Banking Committee of the Institut Luxembourgeois des Administrateurs (ILA) launched its 5th annual two-day forum for directors of Luxembourg credit institutions.
This year independent and executive board members, members of senior management, and key function holders of Luxembourg credit institutions gathered to attend the bank governance workshops and discussions with a focus on the latest updates on regulatory and market practice.
Among key points of focus were the latest CSSF and European Central Bank (the ECB) positions, findings, expectations, the roles and responsibilities of bank boards, subsidiary issues for directors, remuneration committees and policies, IT risk and cybersecurity, and liquidity strategy and risk appetite.
Through the discussions with both the CSSF and the ECB, a few points became clear in terms of current and future trends affecting Luxembourg banks’ corporate governance.
Low interest rates as well as high regulatory and HR costs, have led to increased scrutiny by the CSSF of Luxembourg banks’ profitability and thus on their business plans and risk profiling appetite. This is of course, in addition to the actual profit impact already experienced by banks. For those with a large exposure to Luxembourg real estate, for example, price evolution and interest rates must be addressed as well as the potential effects of the potential bubble quality of the market, Brexit, and others.
Directly linked to profitability and marketplace issues, the digital revolution is also a point of focus of the CSSF as it relates to AML/KYC. Cloud computing is also relevant to profitability considerations.
Anti-money laundering aspects will be subject to even more scrutiny in the next year.
Generally, the regulators are preparing for time allocation analysis for directors (is each bank director dedicating sufficient time to each mandate they hold, what are his/her other tasks and responsibilities, are these compatible and feasible within the relevant timeframe?). While there is no set preference for a particular board composition, which should be tailored to the need of each business, it is clear that sufficient expertise and experience should be reflected as well as a clear lack of conflict of interest. This concept should be defined within each bank and managed properly.
The same goes for an analysis of whether discussions are reflected in board minutes and whether the communication and reporting lines between management, key function holders and the board of directors of banks are in place, properly documented and implemented effectively. In smaller banks, the dialogue between the board of directors and the control functions often needs improvement.
In general, the trend is that both the European and the Luxembourg regulators will take a tougher approach or at least increase scrutiny on corporate governance in a first instance because it is often symptomatic of major issues within a banking institution and because of the reputational damage it can cause to the institution but also to the Luxembourg financial market in general. We can observe in the market (and this is not necessarily specific to Luxembourg institutions) a need for improvement in terms of documenting the discussions during board meetings but also between the board of directors and control functions, which need to be more empowered and given the opportunity to reach out to the board and generally take more initiative and not limit themselves to pure compliance tasks, which is no longer sufficient in today’s regulatory framework. This is often translated in practice by shortcomings in the reporting documentation (non-exhaustive reporting, lack of internal guidance, lack of formalisation, insufficient succession planning etc) or even in remuneration policies (is the performance criteria sufficiently present, is the board involved in the implementation and oversight of the remuneration policy, is the process sufficiently documented?).
Generally, in the Luxembourg market, data quality is also an issue. Are reports produced just meant to tick a box or do they bring comprehensive added value, including when submitted to the board of directors? For instance, issues in governance are often not properly flagged in long form reports and specialised committee reports are too technical with no qualitative assessment. Such reports are difficult to challenge or discuss.
Finally, the agenda of the board of a Luxembourg credit institution will be expected to cover, one way or another, the following topics: risk appetite, strategy, relationship with internal key functions, the keeping of an audit trail, the assessment of quality of key functions and some emphasis as to the fact that key decisions are taken in Luxembourg and not only at group level. Cyber-risk is an emerging topic which requires much greater emphasis.
Both the CSSF and the ECB were of the view that, when it comes to the Luxembourg financial sector, remaining areas of improvement included board composition and succession plan, risk appetite statements, the capacity to challenge the board and for the board to challenge the management as well as the interplay between the risk appetite framework of a bank and other key strategic points such as budget, recovery plan, remuneration etc. It was also noted that the risk strategy should include non-financial risks and that the management of a subsidiary’s strategy should be more present in the governance framework.Anne-Marie Nicolas, ILA Bank committee, November 2017