Cross-Sectoral Issues on Internal Governance

Cross-Sectoral Issues on Internal GovernanceAna Moitinho Byrne

(Instituto de Seguros de Portugal)

Malta, 09/04/2010

CEIOPS

3L3 Task Force on Internal Governance

Cross-sectoral stock-take on internal governance issues

Main findings

Next steps

9 April 2010 Page 2

CEIOPS

• The “3L3 Task Force on Internal Governance” (TFIG)– Created according to the 3L3 Committees “Medium Term Work

Programme” for 2008-2010• Internal governance was one of the 6 priority areas identified for joint

cross-sector work– Composed of experts from the banking, insurance and securities

markets supervisors, members of the three Level 3 committees (CEIOPS, CEBS and CESR)

9 April 2010 Page 3

CEIOPS

• Mandate– Identify consequences of differences in internal

governance requirements in sectoral legislation (both Level 1 and Level 2) which have significant practical consequences for institutions, and making recommendations for Level 3 measures to enhance convergence

– Developing cross-sector guidance for institutions and conglomerates operating in different financial sectors in the area of internal governance, within the current legal framework

9 April 2010 Page 4

Work developed between September 2008 and December 2009

Scope (and timing) yet to be defined

CEIOPS

• Deliverables– Preliminary report in December 2008– Final report

• “Cross-sectoral stock-take and analysis of internal governance requirements”(http://www.ceiops.eu/media/files/consultations/3L3-call-for-evidence-internal-governance/3L3-cross-sectoral-stock-take-and-analysis-internal-governance-v2.pdf)

• Under “Call for Evidence” until... today!(http://www.ceiops.eu/media/files/consultations/3L3-call-for-evidence-internal-governance/3L3-Call-for-evidence-internal-governance.pdf)

9 April 2010 Page 5

This report will be the basis for this presentation.However, some adaptations were made to align the analyses made with

the final advice from CEIOPS to the European Commission.

CEIOPS

Main findings

Next steps

9 April 2010 Page 6

CEIOPS

• Scope of the stock-take– Internal governance provisions applicable to entities in the

areas of banking, insurance and securities• Includes binding (Level 1 and Level 2) and non-binding (Level 3)

provisions

9 April 2010 Page 7

CEIOPS

• Material considered

9 April 2010 Page 8

Level 1 directiveLevel 2 directive/regulationLevel 3 guidance

CEIOPS

• Material considered– Assumptions

• Although the CRD and the CAD do not follow the Lamfalussy legislative architecture, they were compared to Level 1 requirements

• The annexes of the CRD were considered to be comparable to Level 2 requirements

9 April 2010 Page 9

CEIOPS

• Material considered– Interconnections between directives

• Article 34 of the CAD applies Article 22 of the CRD and respective Level 3 measures to every investment firm that is not an exempt CAD firm

• Article 1(2) of MiFID applies the organisational requirements in its Article 13 (and in the Level 2 implementing directive) to credit institutions that carry on one or more investment services or activities

9 April 2010 Page 10

Conclusion: every investment firm that is not an exempt CAD firm is subject to both MiFID and CAD/CRD governance requirements. Consequently, many banks are subject to both MiFID and CRD organisational requirements (at least in relation to the conduct of their securities business). But the purpose of the stock-take was to compare the requirements for each activity on a

standalone basis.

CEIOPS

• Options to proceed– Challenge

• Maintain an appropriate balance between delivering harmonised standards, while maintaining justifiable sectoral differences

• Consider carefully the means of delivering effective harmonisation if that is “desirable”

– Available possibilities• Legislation – amendment of Level 1 directives and/or Level 2

directives or regulations where relevant, including the Level 2 implementing measures for Solvency II

• Guidance – production or amendment of Level 3 guidance either by individual committees (CEBS, CEIOPS and CESR) or by the 3L3 committees together

CEIOPS

• Options to proceed– “Desirable degree of harmonisation”

• The rating was attributed according to the following scale

CEIOPS

• Approach adopted – “building block approach”

Corporate structure and organisation (including management body)

Risk management system

Internal control system

Supervisory review, internal reporting and public disclosure

Group structures and group specific

issues

System of internal governance

CEIOPS

Main findings

Next steps

CEIOPS

Main findingsCorporate structure and organisation

* DDH = Desirable degree of harmonisation

CEIOPS

Main findingsRisk management system

CEIOPS

Main findingsInternal control system

CEIOPS

Main findingsSupervisory review, internal reporting and public disclosure

CEIOPS

Main findingsGroup structures and group specific issues

CEIOPS

* FCD = Financial Conglomerates Directive

CEIOPS

Main findingsMain differences and commonalities

• Existing internal governance requirements for the activities undertaken in the banking, insurance and securities sectors are generally similar and have the same intended outcomes or comparable outcomes

• For the majority of the internal governance aspects that were analysed, many requirements are set at different levels in different sectors– It was often observed that high-level principles for internal

governance that e.g. are defined in the Level 1 directive for the insurance sector are only detailed in Level 3 for the banking sector

CEIOPS

• Some differences in the terminology used – or in its interpretation – were also identified, which the TFIG considers would benefit from some further standardisation to promote further convergence between sectors– Principle of proportionality – it is applicable to most of the

requirements on internal governance entities are subject to

Proportionality applies to internal governance policies Supervisory authorities will adapt their supervisory approach to

ensure it is proportionate to the nature, scale and complexity of the activities of an entity

The principle of proportionality does not justify the non-application of any sort of requirements

The proportionality principle is dealt with slightly differently (wording is often “shall where appropriate and proportionate)

Banking

Insurance

Securities

CEIOPS

• Some differences in the terminology used – or in its interpretation – were also identified, which the TFIG considers would benefit from some further standardisation to promote further convergence between sectors (cont.)– Concept of “independence”

• Does it always imply an organisationally separate unit?– Concept of “function”

• E.g. In Solvency II, it is “an administrative capacity to undertake particular governance tasks”

CEIOPS

• With regard to the differences between MiFID and CRD, further harmonisation of Level 1 and 2 provisions could be considered in order to reduce the number of different requirements for banks that also undertake investment activities

CEIOPS

Main findings

Next steps

CEIOPS

Next steps

• The TFIG considers that guidance would be beneficial on:– Management of conflicts of interest– Policies, processes and procedures related to the risks covered

by the risk management systems– How the risk management, compliance and internal audit

functions might be “independent” in the light of their different sectoral requirements

– The supervisory review process

CEIOPS

Next steps

• The development of guidance in these areas would:– Contribute to a more harmonised interpretation of the

requirements applicable to each type of activities– Complement the existing gaps between sectors in the cases

where no specific requirements exist

Further work to be developed will depend on the results of the “Call for Evidence” process and the conclusions to be taken thereof.

CEIOPS

QUESTIONS?

Thank you!Thank you!ana.byrne@isp.pt

Cross-Sectoral Issues on Internal Governance

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