The implementation of the new governance rules in the banking industry: progress and outlook

In light of the concrete cases faced by the French Prudential Supervision and Resolution Authority (ACPR), this review sets out best practices that supervised entities should follow in order to improve their governance arrangements.

On the composition of supervisory bodies:

• The selection/recruitment/appointment of board members would benefit from being given a more formal structure, as none of the institutions under review had an adequate framework in place for this.

• Moreover, while most of the institutions under review provide training for new board members, in too many instances there are no provisions in place for training members over the course of their mandate, even though this might seem appropriate given the constant changes in the environment, and especially in regulations.

• Efforts to improve gender balance should be continued at all the institutions under review.

• With regard to the presence of independent members on the supervisory bodies, mutual and cooperative groups are invited to develop criteria making it possible to identify individuals that have an equivalent degree of independence to that stipulated in the joint European Securities and Markets Authority (ESMA) and European Banking Authority (EBA) Guidelines. These groups should also ensure that the members thus identified are sufficient in number to guarantee the “sound and prudent management of the business”.

With regard to the functioning of the supervisory bodies:

• Allow a minimum of 5 days prior to the meeting for the submission to board members of documents to be discussed in the session.

• Enhance the minutes of supervisory body meetings so that they provide details of all exchanges that occurred during the meetings and the issues that were discussed.

• Executive and supervisory functions should be clearly separated to ensure the sound and prudent management of the institution.

On risk management and internal control:

• Where not already done, institutions shall formalise their risk appetite framework and ensure it is approved by the supervisory body.

• When approving significant decisions, such as the budget, the determination of internal capital (ICAAP) or the formalisation of the preventive recovery plan, the supervisory body shall ensure that the decisions are consistent with the risk appetite framework and, where necessary, review said framework.

• Institutions have a duty to improve the quality of the information submitted to the supervisory body on “qualitative” risks, such as non‑compliance, legal, IT, conduct/reputation risks.

• The supervisory body shall also ensure that key function holders, such as the heads of ongoing supervision or of risk management, regularly attend board meetings discussing topics within their field.

• Finally, the ACPR stresses that, in accordance with Article L. 511‑59 of the French Monetary and Financial Code, supervisory bodies are required to carry out a formal periodical assessment of their governance arrangements and ensure that corrective measures are implemented to address possible shortcomings. For institutions that have put in place an appointments committee, the latter must periodically, and at least once a year, assess the knowledge, skills and experience of members of the supervisory body, both individually and collectively, in accordance with Article L. 511‑100 of the Monetary and Financial Code.