2020-12-07
Added · Updated
Circular CSSF 12/552 is updated to incorporate European Banking Authority guidelines on internal governance, suitability assessments, default definitions, high-risk exposures, interest rate risk, and modified duration corrections. The scope is extended to financial holding companies and mixed financial holding companies, while proportionality is linked to the notion of systemic institution and clarified for internal control functions. Enhanced provisions regarding diversity and independence of the management body are introduced, along with requirements to consider environmental, social and governance risk factors and a new summary chapter for depositary bank activities. The circular applies in its entirety to credit institutions and in part to professionals performing lending operations, with a separate circular applying to investment firms, and becomes effective on 1 January 2021.
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CIRCULAR CSSF 20/759
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Circular CSSF
20/759
UPDATE OF CIRCULAR CSSF
12/552, AS AMENDED BY
CIRCULARS CSSF 13/563,
CSSF 14/597, CSSF
16/642, CSSF 16/647,
CSSF 17/655, CSSF
20/750 AND CSSF
20/759, ON THE CENTRAL
ADMINISTRATION, INTERNAL
GOVERNANCE AND RISK
MANAGEMENT
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Ladies and Gentlemen,
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c. Clarifications regarding the application of proportionality when
implementing the internal control functions; d. Strengthening of the management body, in its supervisory function, via enhanced provisions with respect to diversity and independence; e. Consideration of environmental, social and governance (ESG) risk factors with a view to ensuring viability of the business model; f. Introduction of a summary chapter dedicated to the activity of depositary bank.
5. Circular CSSF 12/552, as amended, shall be applicable in its entirety to credit
institutions and in part to professionals performing lending operations. Henceforth, a separate circular applies to investment firms.
6. This circular shall apply as from 1 January 2021.
Claude WAMPACH
Director
Marco ZWICK
Director
Jean-Pierre FABER
Director
Françoise KAUTHEN
Director
Claude MARX
Director General
Annex
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Circular CSSF 20/759
Re: Central administration, internal governance and risk management 1 Ladies and Gentlemen, Articles 5(1a) and 17 (1a)38-1 of the Law of 5 April 1993 on the financial sector (“LFS”), supplemented by Regulation CSSF No 15-02 relating to the supervisory review and evaluation (“RCSSF 15-02”) require credit institutions and investment firms to have robust internal governance arrangements, which shall include a clear organisational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks to which they are or might be exposed, adequate internal control mechanisms, including sound administrative and accounting procedures and remuneration policies and practices that are consistent withallowing and promotepromoting sound and effective risk management, as well as control and security mechanisms offor their IT systems. In the past, as a result of the regulatory developments at international level and the local needs, the CSSF specified the procedures for implementing these articles in various circulars. The addition of new circulars transposing the guidelines of the European Banking Authority (EBA) on internal governance of 27 September 2011 ("EBA Guidelines on Internal Governance (GL 44)") and those of the Basel Committee on Banking Supervision (BCBS) on internal audit of 28 June 2012 ("The internal audit function in banks") would have resulted in significant redundancies and a multiplication of the terms used. Thus, the CSSF decided to bring together all the key implementing provisions on internal governance in one single circular. This circular reflects the above-mentioned EBA and BCBS guidelines supplementing them by the additional provisions included in Circulars IML 96/126, IML 98/143, CSSF 04/155, CSSF 05/178 and CSSF 10/4662. Furthermore, in order to provide an overview, this circular includes, by reference to Articles 5 (1) and 17 (1) of the law of 5 April 1993 on the financial sector, the implementing procedures on central administration as specified in Circular IML 95/120. 1 To professionals performing lending operations as defined in Article 28-4 of the Law of 5 April 1993 on the financial sector, Chapter 3 of Part III, with the exception of Sub-chapter 3.4 “Exposures associated with particularly high risk” shall apply. Chapter 2(12) of Part III shall also apply. 2 Circulars IML 96/126 regarding the administrative and accounting organisation, IML 98/143 regarding the internal control, CSSF 04/155 regarding the Compliance function, CSSF 05/178 regarding the administrative and accounting organisation; outsourcing of IT services and CSSF 10/466 regarding disclosures in times of stress. Luxembourg, 7 December 2020 To all credit institutions and professionals performing lending operations1 In case of discrepancies between the French and the English text, the French text shall prevail. The color code used for the “track changes” version is as follows:
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Consequently, Circulars IML 95/120, IML 96/126, IML 98/143, CSSF 04/155, CSSF 05/178 and CSSF 10/466 shall be repealed for credit institutions and investment firms.3 Finally, the purpose of this circular is also to gather all the provisions on risk management. This circular represents a first step on the way to a consolidated regulatory collection in respect of internal governance in a broad sense. It does not include all the targeted areas, such as for example remuneration which is covered by the CRD standards ("Capital Requirements Directive" - Circulars CSSF 06/273 and CSSF 07/290) and by Circular CSSF 11/505 providing details on the principle of proportionality as regards remuneration. The same applies to risk. This circular essentially transposes the CEBS guidelines and the EBA guidelines dated 2 September 2010 on concentration risk ("CEBS Guidelines on the management of concentration risk under the supervisory review process (GL31)"), the guidelines dated 27 October 2010 on liquidity pricing ("Guidelines on Liquidity Cost Benefit Allocation"), the EBA guidelines of 22 May 2015 on the management of interest rate risk arising from non-trading activities (EBA/GL/2015/08) and the EBA guidelines of 14 December 2015 relating to the limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework under Article 395(2) of Regulation (EU) No 575/2013 (EBA/GL/2015/20). Moreover, the circular highlights the basic principles of prudence in the field of credit granting and private wealth management. As far as CRR institutions4 are concerned, this circular shall be read in conjunction with CSSF Regulation N° 15-02 relating to the supervisory review and evaluation process that applies to CRR institutions. The various existing circulars relating to risks and their management will be brought together in a subsequent version of this circular. Where, as a result of international regulatory developments or local needs, the CSSF is called upon to specify the requirements in this circular, it will update this circular.
Part IV of the circular includes a chronology of the updates which enables the reader
to track the changes operated by the successive updates.
3 Circulars IML 95/120, IML 96/126, IML 98/143 shall remain applicable for PFS other than investment firms, as well as Circular CSSF 17/656 which repeals and replaces Circular CSSF 05/178. These circulars together with Circular CSSF 04/155 shall remain applicable for payment institutions and electronic money institutions. 4 The term “CRR institution” is defined in Article 1(1) of CSSF Regulation N° 15-02.
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This Circular specifies the measures credit institutions must take pursuant to the provisions of the LFS and RCSSF 15-02 as regards central administration, internal governance and risk management. It reflects the European and international principles, guidelines and recommendations which apply in this respect, translating them, in a proportionate way, in the context of the Luxembourg banking sector. Where, due to the size, the nature and the complexity of the activities and the organisation, the application of the principle of proportionality requires enhanced central administration, internal governance or risk management, the credit institutions shall refer to the principles set out in Chapter 2 of Part I and to the guidelines and recommendations listed in Part IV of this Circular for guidance on this implementation. This concerns especially the European Banking Authority (“EBA”) Guidelines on internal governance (EBA/GL/2017/11) and the joint EBA and the European Securities and Markets Authority (“ESMA”) Guidelines on the assessment of the suitability of members of the management body and key function holders (EBA/GL/2017/12). The principles and good practices arising from other sources already included in the previous versions of the Circular have been maintained in so far as they have not become obsolete. As regards the appointments of members of the management body and key function holders, this Circular should be read in conjunction with the Prudential Procedure in this respect published on the CSSF website. The Circular is divided into four parts: the first part establishes the scope, the second
part is dedicated to the central administration and internal governance requirements,
the third part covers specific risk management requirements and the fourth part provides for the entry into force and the transitional measures and repealing provisions. The table of contents is as followshistory of the updates, allowing the reader to retrace the amendments entailed by the successive updates. The boxes which appear in the circular include the remarks and clarifications which serve as guidance to update the requirements included in this circular.
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Table of contents
Part I - Definitions and Scope 13
Chapter 1. Definitions and abbreviations 13
Chapter 2. Scope and proportionality 15
Part II. Central administration and internal governance
arrangements 18
Chapter 1. Central administration 18
Chapter 2. Internal governance arrangements 19
Chapter 3. General characteristics of “robust” central
administration and internal governance arrangements 21
Chapter 4. Supervisory body and authorised
management 23
Sub-chapter 4.1. Supervisory body 23
Section 4.1.1. Responsibilities of the supervisory body 23
Section 4.1.2. Composition and qualification of the
supervisory body 28
Section 4.1.3. Organisation and functioning of the supervisory
body 30
Section 4.1.4. Specialised committees 31
Sub-section 4.1.4.1. Audit committee 33
Sub-section 4.1.4.2. Risk committee 35
Sub-chapter 4.2. Authorised management 37
Section 4.2.1. Responsibilities of the authorised management
37
Section 4.2.2. Qualification of the authorised management
41
Chapter 5. Administrative, accounting and IT
organisation 43
Sub-chapter 5.1. Organisation chart and human resources 43 Sub-chapter 5.2. Procedures and 44 internal documentation 46 Sub-chapter 5.3. Administrative and technical infrastructure48
Section 5.3.1. Administrative infrastructure of the business
functions 48
Section 5.3.2. Financial and accounting function 49
Section 5.3.3. IT function 50
Section 5.3.4. Communication and internal and external alert
arrangements 51
Section 5.3.5. Crisis management arrangements 51
Chapter 6. Internal control 52
Sub-chapter 6.1. Operational controls 53
Section 6.1.1. Day-to-day controls carried out by the
operating staff 53
Section 6.1.2. Ongoing critical controls 53
Section 6.1.3. Controls carried out by the members of the
authorised management on the activities or functions which fall under their direct responsibility 54
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Sub-chapter 6.2. Internal control functions 55
Section 6.2.1. General responsibilities of the internal control
functions 55
Section 6.2.2. Characteristics of the internal control functions
56
Section 6.2.3. Execution of the internal control functions' work
58
Section 6.2.4. Organisation of the internal control
functions 59
Section 6.2.5. Risk control function 62
Sub-section 6.2.5.1. 62
Scope and specific responsibilities of the risk control function 62 Sub-section 6.2.5.2. Organisation of the risk control function 65
Section 6.2.6. Compliance function 66
Sub-section 6.2.6.1. Compliance charter 67 Sub-section 6.2.6.2. Scope and specific responsibilities of the compliance function 68 Sub-section 6.2.6.3. Organisation of the compliance function 70
Section 6.2.7. Internal audit function 71
Sub-section 6.2.7.1. Internal audit charter 71 Sub-section 6.2.7.2. Specific responsibilities and scope of the internal audit function 73 Sub-section 6.2.7.3. Execution of the internal audit work 75 Sub-section 6.2.7.4. Organisation of the internal audit function 76
Chapter 7. Specific requirements 77
Sub-chapter 7.1. Organisational structure and legal entities (Know-your-structure) 77
Section 7.1.1. Complex structures and non-standard or
potentially non-transparent activities 78
Sub-chapter 7.2. Management of conflicts of interest 78
Section 7.2.1. Specific requirements relating to
conflicts of interest involving related parties 80 Sub-chapter 7.3. New Product Approval Process 81 Sub-chapter 7.4. Outsourcing 82
Section 7.4.1. General outsourcing requirements 83
Section 7.4.2. Specific IT outsourcing requirements
85
Sub-section 7.4.2.1. IT system management/operation services 86 Sub-section 7.4.2.2. Consulting, development and maintenance services 86 Sub-section 7.4.2.3. Hosting services and infrastructure ownership 87
Section 7.4.3. Additional general requirements 88
Section 7.4.4. Documentation 89
Chapter 8. Legal reporting 90
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Part III. Risk management 90
Chapter 1. General principles as regards risk
measurement and risk management 90
Sub-chapter 1.1. Institution-wide risk management framework 90
Section 1.1.1. General information 90
Section 1.1.2. Specific (risk, capital and liquidity)
policies 90
Section 1.1.3. Risk identification, management,
measurement and reporting 92
Chapter 2. Concentration risk 93
Chapter 3. Credit risk 93
Sub-chapter 3.1. General principles 93
Sub-chapter 3.2. Residential real estate mortgage credit to individuals 95 Sub-chapter 3.3. Credits to real estate developers 96 Sub-chapter 3.4. Exposures associated with particularly high risk 97 Sub-chapter 3.5. Non-performing and forborne exposures 97
Chapter 4. Risk transfer pricing 98
Chapter 5. Private wealth management
(“private banking”) 99
Chapter 6. Exposures to shadow banking
entities 100
Sub-chapter 6.1. Implementation of sound internal control principles 100 Sub-chapter 6.2. Application of quantitative limits 101
Chapter 7. Asset encumbrance 102
Chapter 8. Interest rate risk 103
Sub-chapter 8.1 Interest rate risk arising from non-trading book activities 103 Sub-chapter 8.2. Corrections to modified duration for debt instruments 103
Chapter 9. Risks associated with the custody of
financial assets by third parties 104
Part IV. Chronology 104
Part I - Definitions and Scope 7
Chapter 1. Definitions and abbreviations 7
Chapter 2. Scope and proportionality 9
Part II. Central administration and internal governance
arrangements 11
Chapter 1. Central administration 11
Chapter 2. Internal governance arrangements 11
Chapter 3. General characteristics of “robust” central
administration and internal governance arrangements 13
Chapter 4. Supervisory body and authorised
management 14
Sub-chapter 4.1. Supervisory body 14
Section 4.1.1. Responsibilities of the supervisory body 14
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Section 4.1.2. Composition and qualification of the
supervisory body 18
Section 4.1.3. Organisation and functioning of the supervisory
body 19
Section 4.1.4. Specialised committees 20
Sub-section 4.1.4.1. Audit committee 22
Sub-section 4.1.4.2. Risk committee 23
Sub-chapter 4.2. Authorised management 25
Section 4.2.1. Responsibilities of the authorised management
25
Section 4.2.2. Qualification of the authorised
management 29
Chapter 5. Administrative, accounting and IT
organisation 29
Sub-chapter 5.1. Organisation chart and human resources 29 Sub-chapter 5.2. Procedures and internal documentation 30 Sub-chapter 5.3. Administrative and technical infrastructure 31
Section 5.3.1. Administrative infrastructure of the
business functions 31
Section 5.3.2. Financial and accounting function 32
Section 5.3.3. IT function 34
Section 5.3.4. Communication and internal and
external alert arrangements 34
Section 5.3.5. Crisis management arrangements 35
Chapter 6. Internal control 35
Sub-chapter 6.1. Operational controls 36
Section 6.1.1. Day-to-day controls carried out by
the operating staff 36
Section 6.1.2. Ongoing critical controls 36
Section 6.1.3. Controls carried out by the members
of the authorised management on the activities or functions which fall under their direct responsibility 37 Sub-chapter 6.2. Internal control functions 38
Section 6.2.1. General responsibilities of the internal control
functions 38
Section 6.2.2. Characteristics of the internal control functions
39
Section 6.2.3. Execution of the internal control
functions' work 40
Section 6.2.4. Organisation of the internal control functions
41
Section 6.2.5. Risk control function 45
Sub-section 6.2.5.1. Scope and specific responsibilities of the risk control function 45 Sub-section 6.2.5.2. Organisation of the risk control function 47
Section 6.2.6. Compliance function 48
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Sub-section 6.2.6.1. Compliance charter 48 Sub-section 6.2.6.2. Scope and specific responsibilities of the compliance function 49 Sub-section 6.2.6.3. Organisation of the compliance function 51
Section 6.2.7. Internal audit function 51
Sub-section 6.2.7.1. Internal audit charter 51 Sub-section 6.2.7.2. Specific responsibilities and scope of the internal audit function 53 Sub-section 6.2.7.3. Execution of the internal audit work 54 Sub-section 6.2.7.4. Organisation of the internal audit function 55
Chapter 7. Specific requirements 56
Sub-chapter 7.1. Organisational structure and legal entities (Know-yourstructure) 56
Section 7.1.1. Complex structures and non-standard or
potentially non-transparent activities 56
Sub-chapter 7.2. Management of conflicts of interest 57
Section 7.2.1. Specific requirements relating to conflicts of
interest involving related parties 58
Sub-chapter 7.3. New Product Approval
Process 59
Sub-chapter 7.4. Outsourcing 59
Section 7.4.1. General outsourcing requirements 60
Section 7.4.2. Specific IT outsourcing
requirements 62
Sub-section 7.4.2.1. IT system management/operation services 63 Sub-section 7.4.2.2. Consulting, development and maintenance services 63 Sub-section 7.4.2.3. Hosting services and infrastructure ownership 64
Section 7.4.3. Additional general requirements 65
Section 7.4.4. Documentation 66
Chapter 8. Legal reporting 66
Part III. Risk management 67
Chapter 1. General principles as regards risk
measurement and risk management 67
Sub-chapter 1.1. Institution-wide risk management framework 67
Section 1.1.1. General information 67
Section 1.1.2. Specific (risk, capital and liquidity) policies
67
Section 1.1.3. Risk identification, management,
measurement and reporting 68
Chapter 2. Concentration risk 69
Chapter 3. Credit risk 70
Sub-chapter 3.1. General principles 70
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Sub-chapter 3.2. Residential real estate mortgage credit to individuals 71 Sub-chapter 3.3. Credits to real estate developers 71 Sub-chapter 3.4. Exposures associated with particularly high risk 72 Sub-chapter 3.5. Non-performing and forborne exposures 72
Chapter 4. Risk transfer pricing 73
Chapter 5. Private wealth management (“private
banking”) 73
Chapter 6. Exposures to shadow banking entities 75
Sub-chapter 6.1. Implementation of sound internal control principles 75 Sub-chapter 6.2. Application of quantitative limits 75
Chapter 7. Asset encumbrance 77
Chapter 8. Interest rate risk 77
Sub-chapter 8.1 Interest rate risk arising from non-trading book activities 77 Sub-chapter 8.2. Corrections to modified duration for debt instruments 78
Chapter 9. Risks associated with the custody of
financial assets by third parties 78
Part IV. Chronology 78
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Part I. - Definitions and Scope
Chapter 1. Definitions and abbreviations
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"key function": any function the exercise of which may haveFrom a prudential standpoint, the authorised management shall be in charge of the day-to-day management of an institution, in accordance with the strategic directions and the key policies approved by the supervisory body. In a one-tier system, the authorised managers may also be members of the Board of Directors, while in a two-tier system, the authorised management corresponds strictly to the Executive Board;
3) “institution” shall mean credit institutions incorporated under Luxembourg law,
including their branches, Luxembourg branches of third-country credit institutions and Luxembourg branches of credit institutions authorised in another Member State;
4) “significant institution” shall mean systemically important credit institutions in
accordance with Article 59-3 of the LFS and, if applicable, other credit institutions determined as such by the competent authority based on the assessment of the institutions’ size and internal organisation as well as the nature, the scale and the complexity of their activities;
5) “management body” shall mean the management body, in accordance with
the definition of the LFS, and shall be the management body in its supervisory function and in its management function in accordance with the EBA Guidelines on internal governance (“EBA/GL/2017/11”). It shall refer to the Board of Directors and the authorised management of an institution with a one-tier structure or the Supervisory Board and the Executive Board of an institution with a two-tier structure;
6) “supervisory body” shall correspond to the management body in its
supervisory function in accordance with the EBA Guidelines on internal governance (“EBA/GL/2017/11”) and to the members of the management body who do not perform any executive function within the meaning of the LFS. According to the financial sector regulation, boards of directors and supervisory boards of credit institutions are assigned responsibilities as regards the supervision and control, as well as the determination and approval of strategies and key principles;
7) “related parties” shall mean the legal entities (structures) which are part of
the group to which the institution belongs as well as the staff members, shareholders, managers and members of the management body of these entities;
8) “Prudential Procedure” shall mean the prudential procedure for the
appointment of members of the management body and key function holders in credit institutions;
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2)9) “key function holders” shall mean the heads of functions whose performance allows a significant influence onover the conduct or monitoring of the activities. These key functions of the institutions. They include at least, in particular, the directors, authorised managers and the persons in chargeheads of the three internal control functions in accordance with point 105 (i.e.all institutions, i.e. the Chief Risk Officer (“CRO”) for the risk control function, the Chief Compliance Officer (“CCO”) for the compliance function and the Chief Internal Auditor (“CIA”) for the internal audit function);, as well as the head of the financial function (Chief Financial Officer, “CFO”) in significant institutions;
10) "CEBS shall mean the Committee of European Banking Supervisors;
11) CRD IV shall mean Directive 2013/36/EU of 26 June 2013 on access to the
activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC;
12) CRR shall mean Regulation (EU) No 575/2013 of 26 June 2013 on prudential
requirements for credit institutions and investment firms;
13) EEA shall mean the European Economic Area;
14) ICAAP shall mean the Internal Capital Adequacy Assessment Process;
15) ILAAP shall mean the Internal Liquidity Adequacy Assessment Process;
3)16) LFS" shall mean the Law of 5 April 1993 on the financial sector, as amended;
3) "related parties" shall mean the legal entities which are part of the group to
which the institution belongs as well as the employees, shareholders, managers and members of the board of directors of these entities.
17) MiFID shall mean the Markets in Financial Instruments Directive.
Chapter 2. Scope and proportionality
2. This Circular shall apply to credit institutions and investment firms governed
byincorporated under Luxembourg law, including their branches, as well as their Luxembourg branches of third-country credit institutions and investment firms originating outside the European Economic Area. .
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In respect of the areas for which the CSSF retains an oversight responsibility as host authority – i.e. and as authority in charge of an area outside the banking prudential supervision, respectively - i.e. anti-money laundering and counter terrorist financing measures in the fight against money laundering and terrorist financing, markets in financial instruments and liquidity – Luxembourg branches of credit institutions and , rules applicable to the provision of investment firms originating from a Member State of the European Economic Areaservices and requirements applicable to UCI depositaries – Luxembourg branches of credit institutions authorised in another Member State, in coordination with this institution, shall establish central administration and, internal governance arrangements as well asand risk management arrangements which are comparable to those provided for in this Circular. All entities mentioned in the preceding paragraphs are referred to hereafter as "institutions". In respect of professionals performing lending operations as defined in Article 28- 4 of the LFS, only Chapter 3 of Part III of This Circular shall apply.
Chapter 6 of Part III of this circular applies only to credit institutions.
2. The circular shall apply to institutions, on a single stand-alone sub-consolidated
and consolidated basis.
3. Where there are legal entities, whether consolidated, to financial holding
companies or not, whose mixed financial holding companies referred to in Article 21a(1) of CRD IV and to credit institutions referred to in Article 21a(4)(c) of CRDI IV. If the institution is a parent undertaking is the institution within the meaning of the LFS, the term "institution" shall refer to the "group", i.e. the entire group represented by the parent undertaking (the "group head") and the legal entities whose parent undertaking is the institution within the meaning of the LFS. (group head), the Circular shall then apply to “the "group"” as a whole,: to the parent undertaking and the various legal entities that are part of it,this group - whether or not they are included in the scope of prudential consolidation according to the CRR - including their possiblethe branches, as well as the relationships between these legal entities, in compliance with the national laws and regulatory provisions which apply to the legal entities in question. In the case of legal entities in which the institution holds an interest of between 20% and 50% but whose parent undertaking is not the institution within the meaning of the LFS, the institution - group head - together with the other shareholders or partners concerned shall do their utmost to make sure that central administration and internal governance arrangements as well as risk management arrangements are implemented within these legal entities. These arrangements shall meet standards which are comparable to those provided for in this circular and comply with the laws and regulatory provisions applicable at national level.
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Regardless ofThus, whatever the organisational and operational structure of the institution or a group, the implementation of this Circular enablesshall enable the institution to have complete control over its activities and the risks to which it is or may be exposed, irrespective ofincluding the location of theseintra-group activities and risks. and regardless of the location of the risks.
3. Proportionality shall apply to the implementing measures, which the institutions
take pursuant to this Circular, having regard to the nature, scale and complexity of thetheir activities, including the risks and organisation of the institution. . In practice, the application of the principle of proportionality implies that the largest, most complex or riskiest institutions shallwhich are more significant, complex or riskier have in place enhanced central administration and, internal governance and risk management arrangements. These enhanced arrangements shall include, for example, the establishment of specialised committees pursuant, the appointment of independent members additional to Section 4.1.4. Howeverthe supervisory body or additional authorised managers to facilitate the day-to-day management. Conversely, for institutions which are smaller in size and internal organisation, whose activity is less diversified, significant or complexactivities are minor in terms of nature, scale and complexity, the principle of proportionality could be applied less strictly.downward. Thus, these institutionsan institution with limited activities of low complexity may operate properly within the meaning of this Circular with by designating heads of compliance and risk control functions assumed on a part-time basis (cf. points 129 and 141), with an outsourcedwithout questioning the principle of permanence of the function) or by fully or partially outsourcing the performance of the operational tasks of the internal audit (point
117) or through the use of external experts in order to carry out some internal
control tasks (point 118).. The less stringentdownward application of the principle of proportionality is limited, in particular, by the principle of segregation of duties under which the duties and responsibilities shall be assigned so as to avoid conflicts of interest involving the same person (cf. point 71). At the level of the authorised management, this principle is balanced with the principle of overall responsibility of the authorised management (cf. point 72). While the division of duties. While the allocation of tasks within the authorised management is done in compliance with the principle of segregation of duties, joint liabilityresponsibility shall be maintained. In application The implementation of the principle of proportionality, where an institution does not require more than two authorised managers, shall take account of the effective division of duties is not always compatible with a strict segregation of duties within this management. For instance, in this case, following:
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c. the size of the institution and its subsidiaries as well as the nature and
complexity of the activities (including the type of customers and the complexity of the products and contracts); d. the nature and complexity of the organisational and operational structure, including the geographic footprint, the distribution channels and the outsourced activities; e. the nature and state of the IT systems and continuity systems. Regardless of the organisation adopted organisation, the arrangements in this respect shall enable the institution to operate in full compliance with the provisions of Chapter 3 of Part II. Part II of this Circular. The institutions shall document their proportionality analysis in writing and have their conclusions approved by the supervisory body.
Part II. Central administration and internal
governance arrangements
Chapter 1. Central administration
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3. The administrative centre shall include in particular a soundthe administrative,
accounting and IT organisation which ensuresshall ensure, at all times, proper administration of securities and assets, properadequate execution of operations, accurate and complete recording of operations and production of accurate, complete, relevant and understandable management information available without delay. In this respect, it shall include the administrative infrastructure of the business functions (Section 5.2.1), the support functions, in particular in the financial and accounting field (Section 5.2.2) and the IT field (Section 5.2.3) as well as the internal control (Chapter 6).
4. Where the institution is the group head pursuant to point 3, the central
administration shall enable the institution to concentrate allany management information necessary to manage, monitor and control , on an ongoing basis, the activities of the group in, on an ongoing basis, within its registeredhead office in Luxembourg. Similarly, the central administration shall enable the institution to reach all legal entities and branches which are part of the group in order to provide them with any requirednecessary management information. The concept of management information shall be understood in the broadest possible sense, including financial information and the prudentiallegal reporting.
Chapter 2. Internal governance arrangements
5. Internal governance is a limited but crucial component of the corporate
governance framework, focusingfocussing on the internal structure and organisation of an institution. Corporate governance is a broader concept which may be described as the set of relationships between an institution, its board of directorssupervisory body, its authorised management, its shareholders and the other stakeholders. Internal governance shallmust ensure in particular a sound and prudent business management of the activities, including the risksof inherent in them. In order to achieve this objective, the institutions shall establish risks. The internal governance arrangements which are consistent with the three-lines-of-defence model. The first line of defence consists of the business units that take or acquire risks under a predefined policy and limits and carry out controls as described under
Section 6.1.1.
“The second line is formed by the support functions, including the financial and accounting function (Section 5.2.2 of this circular), and the compliance and risk control functions (Sub-chapter 6.2 and Sections 6.2.5 and 6.2.6 of this circular and guideline 3.36 implemented by Circular CSSF 20/750 on the information and 6 Guideline 1.3 in the French version.
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6.2 and Section 6.2.7, provides an independent, objective and critical review of
the first two lines of defence.
6. The three lines of defence are complementary, each line of defence assuming its
control responsibilities regardless of the other lines. The controls carried out by the three lines of defence shall include the four levels of control provided for in point 100.:
4. In essence, and for the purpose of complying with the objectives laid down in the
preceding point, the internal governance arrangements shall include in particular:
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10. The institutions shall publishdisclose the key elements of theiron internal
governance arrangementsand risk management in complianceaccordance with the rules governing Part XIX of Circular CSSF 06/273 ("Pillar 3"). This publication shall comprise provisions of the organisational and operational structure, including as regards the internal control, risk strategy as well as risk profile. This information shall describe the current situationCRR (Article 435 and its expected development in a clear, objectiveTitle I of Part Eight) and relevant manner.the EBA Guidelines on disclosure requirements under Part Eight of Regulation (EU) No 575/2013 (“EBA/GL/2016/11”).
Chapter 4. Board of directorsSupervisory body and authorised
management
Sub-chapter 4.1. Board of directorsSupervisory body
Section 4.1.1. Responsibilities of the board of directorssupervisory
body
11. The board of directorssupervisory body shall have the overall responsibility for
the institution. It shall ensure execution of activitiesdefine, monitor and preserve business continuity by way of sound bear responsibility for the implementation of robust central administration, governance and internal governance arrangements pursuant to the provisions of this circular. To this end, in compliancecontrol arrangements, which shall include a clearly structured internal organisation and independent internal control functions with the legal and regulatory provisionsappropriate authority, stature and resources with respect to their responsibilities. The implemented framework must ensure the sound and prudent management of the institution, preserve its continuity and protect its reputation. To this end, after having heard the authorised management and the persons in chargeheads of the internal control, and for functions, the purpose of protecting the institution and its reputation, the board of directorssupervisory body shall approve and lay down, in writing, notably the following key elements of the central administration, internal governance and risk management arrangements:
the business strategy (business model) of the institution taking into account , considering the institution’s long-term financial interests, solvency and, liquidity situation;
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25/109 supervisory body, including the aspects of diversity, responsibilities, organisation and, operation of the board of directors, and individual and collective assessment of its members. 8 The guiding principles governing the appointment and succession of individuals with key functions in the institution provide that, in this regard, the institutionaspects of diversity shall comply with the requirements of this circular, the prudential authorisation procedure of key function holders as published on the CSSF’s website as well as the guidelines published byrefer to the EBA on 22 November 2012 (Guidelines on the assessment of characteristics of the suitability of members of the management body and key function holders – EBA/GL/2012/06). 8 In complianceaccordance with the corporate governance, the guiding principles and procedures applicable to the members of the board of directorssupervisory body are, where appropriate, to be submitted, where applicable, to the shareholders for approval. , under the Prudential Procedure as published on the CSSF website.
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The board of directorsassessment and re-approval by the supervisory body shall relate, in particular, assess and approveto the following:
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15. The board of directors issupervisory body shall be in charge of promoting an
internal risk and compliance culture which heightensraises the awareness of the institution’s staff as regards the requirements of a sound and prudent risk management and which fosters a positive attitude vis-à-vistowards internal control and compliance. It shall also be in charge of stimulating the development of the internal governance arrangements which allow reaching these objectives. In respect of the internal control functions, the board of directorssupervisory body shall ensure that the taskswork of these functions are executedis performed in compliance with the recognised standards. Moreover, and under the board of directors approves the internal audit plan pursuantapproved policies.
16. The supervisory body shall ensure that sufficient time is devoted to point 151risk
issues.
17. Where the board of directorssupervisory body becomes aware that the central
administration or internal governance arrangements no longer enableensure a sound and prudent business management or that the risks incurred risks are or will no longer be properlyadequately borne by the institution’s ability to manage these risks, by theown funds or regulatory or internal own funds or liquidity reserves, it requires the authorised management to provide it , without delay, with the corrective measures, without delay, and to inform the CSSFcompetent authority thereof forthwith. The requirementobligation to notify the CSSFcompetent authority also relates toconcerns all information which casts doubt on the qualification or professional standinggood repute of a member of the board of directorsmanagement body or the authorised management or a person in charge of an internal controlhead of a key function.
Section 4.1.2. Composition and qualification of the board of
directorssupervisory body
18. The number of The members of the board of directors shallsupervisory body must
be in sufficient number and the board of directors, as a whole shall, must be properly composed adequately so that itthe supervisory body can fully meet its responsibilities. The adequacy of the composition of the board of directorssupervisory body refers, in particular, to professional skills (qualifications (adequate knowledge, understanding skills and experience), as well as to the personal qualities of the members of the board of directors.supervisory body. Moreover, each member shallmust demonstrate his/her professional standingrepute. The guiding principles governing the electionappointment and succession of the directorsmembers of the supervisory body explain and determineprovide for the abilities deemed necessary to ensure an appropriate composition and qualification of the board of directorssupervisory body.
19. The board of directors as a whole shallThe supervisory body must collectively
have appropriate knowledge, skills and experience with regard to the nature, scale and complexity of the activities and the organisation of the institution.
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The board of directors, as a collectiveCollectively, the supervisory body, shall must fully know and understand all the activities (and inherent risks) as well as the economic and regulatory environment in which the institution operates. Each member of the board of directorssupervisory body shall have a completefull understanding of the internal governance arrangements and of his/her responsibilities within the institution. The members shall control the activities which fall within their areas of expertise and shall have a soundgood understanding of the other significant activities of the institution.
20. The members of the board of directorssupervisory body shall ensure that their
personal qualities enable them to properly perform their director’s mandate effectively, with the required commitment, availability, objectivity, critical thinking and independence of mind. In this respect, the board of directorssupervisory body cannot have among its members a majority of persons who take on an executive role within the institution (authorised managers or other employeesstaff members of the institution, with the exception of staff representatives elected in accordance with the applicable regulations). The members of the board of directors make suresupervisory body shall ensure that their director’s mandate is and remains compatible with any other positions, mandates and interests they may have, in particular in terms of conflicts of interest and availability. They shall inform the board of directorssupervisory body of the mandates they have outside the institution.
21. The terms and conditionsof reference of the directors’ mandates shallmust be laid
down so as to enablethat the board of directors tosupervisory body may fulfil its responsibilities effectively and on an ongoing basis and effectively.. The renewal of the existing directors'members' mandates shallmust, in particular, be based on their past performance. Continuity in the functioning of the board of directors shallsupervisory body must be ensured.
22. The guiding principles governing the appointment and succession of the members
of the board of directorssupervisory body provide for the measures required in order for these members to be and remain qualified throughout their mandate. These measures shall include professional trainingsa specific initiation to understand the structure, the business model, the risk profile and the governance arrangements, and then vocational training programmes which enable the members of the boardsupervisory body, on the one hand, to understand the operations of directorsthe institution, their role and, on the other hand, to update and develop their required skills.
23. Each institution should appoint at least one member to its supervisory body who
may be considered as “independent member”.
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An independent member of the supervisory body shall not have any conflict of interest which might impair his/her judgement because s/he is or has been, in the recent past, bound by any professional, family or other relationship with the institution, its controlling shareholder or the management of either. As to the assessment of “being independent”, the institutions shall apply the criteria of
Section 9.3 of EBA/GL/2017/12 as provided for in Annex I.
The significant institutions or the institutions whose shares are admitted to trading on a regulated market shall ensure that their supervisory body has a sufficient number of independent members, considering their organisation and the nature, the scale and the complexity of their activities.
Section 4.1.3. Organisation and functioning of the board of
directorssupervisory body
7. The board of directorssupervisory body shall regularly meet on a regular basis in
order to effectively performfulfil its duties.
23.24. responsibilities. The workorganisation and functioning of the board of
directorssupervisory body shall be documented in writing. This documentation shall include the agenda of the meeting, the minutes of the meeting as well as the decisions and measures taken by the board of directorsThe objectives and responsibilities of its members shall also be documented by way of written mandates.
25. The board of directorsThe work of the supervisory body must be documented in
writing. This documentation shall include the agenda and minutes of the meetings as well as the decisions and measures taken by the supervisory body. The minutes are an important tool which must, on the one hand, help the supervisory body and its members monitor the decisions and, on the other hand, enable the body and its members to be accountable to the shareholders and the competent authorities. Thus, the routine items may be included in the minutes of a meeting succinctly, in the form of a simple decision, while important items on the agenda involving risks for the institution or jointly discussed must be reported in more detail, allowing readers to follow the discussions and to identify the positions taken.
8. The supervisory body shall assess, on a regular basis, the procedures governing
the board of directors, its operating mode of functioning and its work in order to regularly improve them, to ensure their effectiveness and to verify whether the applicable procedures are complied with in practice.
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24.26. The chairman of the board of directors is in charge of promoting,It shall ensure
that all its members have a clear picture of their obligations, responsibilities and allocation of tasks within the board of directors, a culture of informed and contradictory discussion and to propose the election of independent directors. An independent director shall be a director who does not have any conflict of interest which might impair his/her judgement because s/he is bound by a business - family or other9 - relationship with the institution, its controlling shareholder or the management of either.supervisory body and specialised committees that depend on it. The CSSF recommends larger institutions to have one or several independent directors.
9. The mandates of authorised manager and chairman of the board of directors
cannot be combined.
27. The chairperson of the supervisory body shall ensure a balanced composition
thereof, in particular in terms of diversity, to ensure its proper functioning, to promote a culture of informed discussion in which all parties are heard within the supervisory body and to propose the appointment of independent members. The chairperson of the supervisory body shall not exercise executive functions within the institution, save in exceptional situations to be authorised by the competent authority.
Section 4.1.4. Specialised committees
28. For the purpose of increasing its effectiveness, the board of directorsThe
supervisory body may be assisted by specialised committees notably, in particular, in the fields of auditing, riskaudit, risks, compliance, remuneration, human resources (notably through the intervention of a nomination committee of the key function holders) as well as and appointments or internal governance, and professional ethics, according to its needs and compliance whereconsidering the organisation, nature, scale and complexity of the institution and its activities so require. These committees shall include directors who are not members either of the authorised management or of the institution’s staff. They may also include, if need be, external independent experts of the institution.activities. Their mission ismissions shall be to provide the board of directorssupervisory body with critical assessments in respect of the organisation and operationfunctioning of the institution in the aforementionedtheir specific areas in order to enable theof competence.
29. The significant institutions must put in place an audit committee, risk committee,
nomination committee and a remuneration committee.
9 Including an employment relationship.
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30. In accordance with the principle of proportionality, the institutions that are not
significant may put in place dedicated committees combining different areas of responsibility, for example, an audit and risk committee, an audit and compliance committee or a risk and remuneration committee. The members of such committees must possess the necessary knowledge, skills and experience to perform their functions, both individually and collectively.
31. Without prejudice to the specific legal and regulatory requirements in this respect,
the permanent members of the boardspecialised committees shall be, as the case may be, members of the supervisory body who do not perform any executive function within the institution or independent members. Each committee shall be composed of at least three members whose knowledge, skills and expertise are in line with the missions of the committee. Where there are several specialised committees within an institution and in so far as the number of non-executive and independent members of directors to fulfil their supervisory mission and to the supervisory body allows it, the institution should ensure that the members of the respective committees are different. Moreover, the institution should try to ensure a rotation of the chairpersons and members of the committees, considering the specific experience, knowledge and skills required on an individual and collective basis.
32. The specialised committees shall be chaired by one of their members. These
committee chairpersons shall have in-depth knowledge in the area of activities of the committee they chair and shall ensure a critical and constructive debate within the committee.
33. The CSSF recommends that the significant institutions’ risk committee have a
majority of independent members, including its chairperson.
25.34. The specialised committees shall meet on a regular basis in order to discharge
their tasks and work assigned to them or to prepare the meetings of the supervisory body. According to their needs, they may be assisted by external experts independent of the institution, and may involve, in their work, the réviseur d’entreprises agréé, the authorised managers, the other specialised committees, the heads of the internal control functions and the other persons working for the institution, provided that these persons are not members and do not take on their responsibilities pursuant to this circularpart in the recommendations of the committee.
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26.35. The board of directorssupervisory body shall lay down, in writing:, the
mandatemissions, composition and working procedures of the specialised committees. Pursuant toUnder these procedures, the specialised committees shall receive regular reports from the internal control functions on the development in the institution’s risk profile, the breaches of the regulatory framework, the internal governance and the risk management as well as the concerns raised through the internal alert arrangements and the remedial actions. The specialised committees must be able to request any document and information they deem necessary to fulfil their mission. Moreover, the The committees shall document the agendas of their meetings as well as the findings and recommendations according to the same principles as in point 25. Furthermore, the procedures shall provide for the conditions under which the réviseur d’entreprises agréé as well as any person belonging to the institution, including the authorised management, are associated withexternal experts provide their assistance and the terms under which other persons are involved in the work of the specialised committees.
27.36. The board of directorssupervisory body shall ensure that the variousdifferent
committees interact effectively interact , communicate with each other, with the internal control functions and the réviseur d'entreprises agréé, and report to the board of directorssupervisory body on a regular basis.
10. The board of directorssupervisory body cannot delegate its decision-making
powers and responsibilities to specialised committees pursuant to this Circular.
11. to the specialised committees are chaired by one of their members. These
committee chairmen shall have in-depth knowledge in the area of activities of the committee they chair.
28.37. . Where the board of directorsit is not assisted by specialised committees, the
tasks referred to in Sub-sections 4.1.4.1 and 4.1.4.2 shall be directly incumbent upon the board of directors.it. Sub-section 4.1.4.1. Audit committee10
29.38. The purpose of the audit committee isshall be to assist the board of
directorssupervisory body in the areas of financial information, internal control, including internal audit as well as the controlaudit by the réviseur d'entreprises agréé.
12. The CSSF recommends larger Without prejudice to the other provisions of Section
4.1.4, the institutions tomust establish an audit committee in order to facilitate effective supervision of the activitieswhen imposed by the board of directors. 10 In respect of institutions which shall have an audit committee pursuant to the law of 18 December 2009 concerning the audit profession, this circular shall apply without prejudice to the codified provisions of Article 74 ("Audit Committee") of this law.
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30.39. The audit committee shall comprise at least three members and its
composition shall be determined in accordance with its missions and its mandate pursuant to points 33 and 34. The collective competencesArticle 52 of the members of the audit committee shall be representative of the activities and risks of the institution and include specific competences regarding audit and accounting. The audit committee can involve the person in charge of the internal audit function as well as the réviseur d'entreprises agréé of the institution in the work of the authorised management. These persons can attend the committee's meetings; they are not members of it.Law of 23 July 2016 concerning the audit profession, as amended (“Audit Law”).
31.40. The functioning of The audit committee, in particular in terms shall be in charge
of the process of frequencyappointment, reappointment, revocation and durationremuneration of the meetings, shall be determined in relation to its mandate and its mission to assist the board of directors. réviseur d’entreprises agréé.
32.41. The audit committee shall confirm the internal audit charter (point 144).as well
as the multi-annual audit plan and its reviews. It shall assess whether the human and material resources used for the internal audit are sufficient and shall make sure that the internal auditors have the required skills (point 111) and that the independence of the internal audit function is safeguarded.
13. The audit committee shall confirm the internal audit plan (point 151) confirmed by
the authorised management. It shall take note of the information on the state of the internal control provided by the authorised management at least once a year pursuant to point 61 of this circular.
14. The audit committee shall deliberate, on a regular basis, on11:
42. the follow-up of The audit committee shall regularly and critically deliberate on
the following12:
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35.45. The CSSF recommends largersignificant institutions as well as institutions with
a higher or more complex risk profile to createmust establish a risk committee in order to facilitate the effective risk control by accordance with the boardprovisions of Article 7 of directors. RCSSF 15-02.
15. The risk committee can involve the authorised management as well as the persons
in charge of the internal control in its work. These persons can attend the committee's meetings; they are not members of it.
36.46. The risk committee shall confirm the specific policies of the authorised
management in accordance with Section 4.2.31.1.2 of Part III. It shall assist the supervisory body in its supervisory mission, i.e. implementing the risk strategy, the overall risk-taking and risk management framework and the adequacy of all the incurred risks relating to the strategy, the risk appetite and the risk mitigation measures of the institution.
37.47. The risk committee shall assess whether the human and material resources,
as well as the organisation of the risk control function (Section 6.2.5) are sufficient and shall ensure that the members of the risk control function have the required skills.
48. The risk committee shallThe risk committee shall advise and assist the
supervisory body in the recruitment of external experts that the supervisory body would hire to provide advice or support.
49. The risk committee shall regularly and critically deliberate, on the following:
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40.52. Pursuant to ArticlesArticle 7 (2) and 19 (2) of the LFS, the members of the
authorised management shallmust be authorised to effectively determine the business direction effectively. Consequently, where management decisions are taken by larger management committees which are larger rather than solely by the authorised management, at least one member of the authorised management shallmust be part of it and have a veto right.
41.53. The authorised management shall, in principle, perform its duties as a
permanent function within the institution; it must be permanently on -site. Any exemption to this principle shall be authorised by the CSSF.
42.54. The authorised management shall implement, through written internal written
policies and procedures, all the strategies and guiding principles laid down by the board of directorssupervisory body in relation to central administration and internal governance, in compliance with the legal and regulatory provisions and after having heard the internal control functions. The policies shall include detailed measures to be implemented; the procedures shall be the work instructions which govern this implementation. The term "“procedures"” is to be taken in the broad sense, including all the measures, instructions and rules governing the organisation and internal functioning. ItThe authorised management shall ensure that the institution has the necessary internal control mechanisms, technical infrastructures and human resources to ensure a sound and prudent businessmanagement of the activities (and inherent risk) management risks) within the context of robust internal governance arrangements pursuant to this Circular.
55. Pursuant to point 18Under the guiding principles of professional conduct,
corporate values and management of conflicts of interest laid down by the supervisory body, the authorised management shall define an internal code of conduct applicable to all the persons working in the institution. It shall ensure its correctproper application on the basis of regular controls carried out by the compliance and internal audit functions. The purpose of this code of conduct must be the prevention of operational and reputational risks which the institution may incur as a result of administrative or criminal sanctions, restrictive measures imposed on a regular basis. it or legal disputes, the damage to its corporate image or the loss of the trust of its customers and the consumers. The code of conduct should remind the staff and the members of the management body of the compliance with the applicable regulations, the internal rules and limitations, the principles that underlie honesty and integrity in their behaviour as well as the cases of inappropriate conduct and the sanction measures arising therefrom.
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43.56. The authorised management shallmust have an absolutea full understanding
of the organisational and operational structure of the institution, in particular, in terms of the underlying legal entities (structures), of their raison d'être, the intragroup links and interconnections between theminteractions as well as the risks related theretorisks. It shall ensure that the required management information is available, in due time, at all decision-making and control levels of the institution and legal structures which are part of it.
44.57. In its day-to-day management, the authorised management shall take into
accountconsider the advice and opinions provided by the internal control functions. Where the decisions taken by the authorised management have or could have a significant impact on the risk profile of the institution, the authorised management shall first obtain the opinion of the risk control function and, where appropriate, of the compliance function. The authorised management shall promptly and effectively implement the corrective measures to address the weaknesses (problems, shortcomings and, irregularities or concerns) identified throughby the internal control functions and, the réviseur d’entreprises agréé by taking into account theiror through the internal alert arrangements, by considering the recommendations issued in this respect. This approach shall be laid down in a written procedure which the board of directorssupervisory body shall approve upon proposal of the internal control functions. According to this procedure, the internal control functions shall prioritise the various weaknesses they identified and set, upon approval of the authorised management, the (short) deadlines by which these weaknesses shall be remedied. The authorised management shall designate the business units or persons in charge of the implementation of the corrective measures by allocating the resources (budgetsbudget, human resources and technical infrastructure) required in this respect.for that purpose. The internal control functions areshall be in charge of monitoringfollowing up on the implementation of the corrective measures. The authorised management shall inform the board of directors about Any significant delay in the implementation of the corrective measures as it shallshall be notified by the authorised management to the supervisory body which must authorise time extensions for the implementation of the correctivethese measures. The institution shall establish a similar procedure, approved by the board of directorssupervisory body, which appliesshall apply where the CSSFcompetent authority requests the institution to take (corrective) measures. In this case, any significant delay in the implementation of these measures is to be notified by the authorised management to the board of directors and the CSSF. The CSSF authorises time extensions as regards implementation.supervisory body and the competent authority.
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45.58. The authorised management shall verify the implementation of and compliance
with internal policies and procedures. Any violationbreach of internal policies and procedures shall result in prompt and adapted corrective measures.
46.59. The authorised management shall verify the soundnessrobustness of the
central administration and internal governance arrangements on a regular basis. It shall adapt the internal policies and procedures in light of the internal and external, current and anticipated changes, and the lessons learnt from the past.
47.60. The authorised management shall inform the internal control functions of any
significant changesmajor change in the activities (cf. Sub-chapter 7.3) or organisation in order to enable them to identify and assess the risks which may arise therefrom.
61. The authorised management shall regularly or at least annually inform the
supervisory body, in a comprehensive manner and in writing, on a regular basis and at least once a year, the board of directors of the implementation, adequacy, effectiveness of and compliance with the internal governance arrangements, includingcomprising the state of compliance and(including the concerns raised through the internal alert arrangements) and of internal control as well as the ICAAP report13/ILAAP reports on the situation and the management of the risks and the, internal and regulatory own fundscapital and liquidity (reserves). This information shall relate in particular to the state of internal control. .
48.62. Once a year, the authorised management shall confirm compliance with this
Circular to the CSSFcompetent authority by way of a single written sentence followed by the signatures of all the members of the authorised management. Where due to non-compliance, the authorised management is not able to confirm full compliance with the Circular, the aforementioned statement takes the form of a reservation which outlines the non-compliancecompliant items by providing explanations on their raison d'être. For credit institutions, The information to be provided to the CSSF pursuant to the first paragraph shallmust be submitted to the CSSF together with the annual accounts to be published to the competent authority. 13 Cf. point 26 of Circular CSSF 07/301.
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49.63. Where the authorised management becomes aware that the central
administration and internal governance arrangements no longer enable a sound and prudent business management of the activities or that the risks incurred risks are or will no longer be properly borne by the institution’s ability to manage these risks, by the internal and regulatory or internal own funds orcapital and liquidity reserves, it shall inform the board of directorssupervisory body and the CSSFcompetent authority by providing them, without delay, with any necessary information to assess the situation (cf. also point 22)..
50.64. Notwithstanding the overalljoint responsibility of the members of the
authorised management (cf. point 72),, it shall designate at least one of its members towho shall be in charge of the administrative, accounting and IT organisation and who shall assume responsibility for implementing the policy and rules that it has established in this context. S/heThis member shall be in charge, in particular, in charge of developingdrawing up the organisation chart and the task description (cf. point 68) which s/he submits, prior to their implementation, to the authorised management for approval. S/he then shall ensure their proper implementation.application. The member in question shall also be in charge of the provisionproduction and publication of accounting information intended for third parties and the transmission of periodic information to the CSSF.competent authority. Thus, s/he shall ensure that the form and content of this information comply with the legal rules and the rulesinstructions of the CSSFcompetent authority in this field. The authorised management shall also designate, among its members, the person(s) in charge of the internal control functions.
51.65. The institutions shall provideinform the CSSF with information on the persons
referred to in point 105.competent authority of the appointments and removals of the members of the authorised management shall report to the CSSF in writing and as soon as possible, on the appointments and revocations of these persons by giving , in accordance with the groundsprovisions of this Circular and the Prudential Procedure, stating moreover the reasons for revocationthe removal.
Section 4.2.2. Qualification of the authorised management
52.66. The members of the authorised management shall, both individually and
collectively, should have the necessary professional competences (expertise, understandingqualifications (knowledge, skills and experience), the professional standinggood repute and personal qualities to manage the institution and effectively determine the business direction effectively. The personal qualities shall be those which enable them to properlyeffectively perform their authorised manager’s mandate with the required commitment, availability, objectivity, critical thinking and independence of mind.
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Section 4.2.3.Specific (risk, capital and liquidity) policies
16. The risk policy which implements the risk strategy of the board of directors shall
include:
the institution’s risk tolerance determination;
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Chapter 5. Administrative, accounting and IT organisation
Sub-chapter 5.1. Organisation chart and human resources
53.67. The institution shall have a sufficient number of human resources on -site with
appropriate individual and collective professional skills in order to take decisions under the policies laid down by the authorised management and based on delegated powers, and in order to implement the decisions taken in compliance with the existing procedures and regulations. These decision-making and implementation tasks, including the initiation, recording, follow-up and monitoring of the operations, and the internal control tasks are carried out on the basis of an organisation chart of the functions and task description adopted by the authorised management in writing. The organisation chart and task description areThe organisation chart and the task description shall be laid down in writing and made available to all relevant staff in an easily accessible manner.
54.68. The organisation chart shall show for structure of the different functions
(business, support and control) functions as well as forand of the different business units (services, departments or positions) their structure and must be presented in the organisation chart, along with the reporting and businessfunctional lines between themwith each other and with the authorised management and the board of directorssupervisory body.
55.69. The task description to be filled in by the operating staff shall explain the
function, powers and responsibility of each officer.
56.70. Without prejudice to point 72, The organisation chart and the task description
shall be established based on the principle of segregation of duties. Pursuant to this principle, the duties and responsibilities shall be assigned so as to avoid that they aremaking them incompatible for the same person. The goal pursued isshall be to avoid conflicts of interest and to prevent, through a peer reviewreciprocal control environment, a person from making mistakes and irregularities which would not be identified.
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57.71. Pursuant to ArticlesArticle 7 (2) and 19 (2) of the LFS, the authorised
management shall be jointly liable for the management of the institution. The principle of segregation of duties cannotshall not derogate from this joint liability. Moreover, It shall remain compatible with the practice whereby the members of the authorised management share the day-to-day tasks relating to the close monitoring of the various activities. In this context, the CSSF recommends toThe institution must organise this segregationallocation so as to avoid conflicts of interest. Thus, it is advisable not to assign thethe same member of the authorised management cannot be in charge of or be responsible for functions relating to both the risk-taking and the independent control of these risks to the same member of the authorised management. Similarly,. Moreover, if in an institution limited in size and activity, and composed of only two authorised managers, there are conflicts of interest between these two managers following the assignment of the risk-taking function and the risk control function and if these conflicts of interest cannot be mitigated effectively, a third authorised manager who himself/herself serves as Chief Compliance Officer pursuant to point 141, cannot, at the same time, be in charge of the internal audit function. Where, due to the small size of the institution, several duties and responsibilities have to be assigned to the same person, this grouping shall be organised so that it does not prejudice the objective pursued by the segregation of dutiesappointed.
58.72. The institution has an ongoingshall have a continuing vocational training
programme which shall ensure that the staff members as well as the board of directors and the authorised management body remain qualified and includeunderstand the internal governance arrangements as well as their own roles and responsibilities in this regard.
59.73. Each employee shall annually staff member must take at least tentwo
consecutive calendar weeks of personal days off.leave annually. It must be assured that the employeeeach staff member is actually absent during that leave and that his/her substitute actually takes charge of the work of the absent person. Sub-chapter 5.2. AdministrativeProcedures and technical infrastructure
18. The institution shall have support functions, necessary and sufficient material and
technical resources to execute its activities. In this respect, the principles laid down in Sections 5.2.1 to 5.2.5 shall apply.
Section 5.2.1. Administrative infrastructure of the business
functions
19. Each business function shall be based on an administrative infrastructure which
guarantees the implementation of the business decisions taken and their proper execution, as well as compliance with the powers and procedures for the area in question.
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Section 5.2.2.Financial and accounting function
20. The institution shall have a financial and accounting department whose mission is
to assume the accounting management of the institution. Some parts of the financial and accounting function within the institution may be decentralised, provided however that the central financial and accounting department centralises and controls all the entries made by the various departments and prepares the global accounts. The financial and accounting department shall ensure that other departments intervene in full compliance with the chart of accounts and the instructions relating thereto. The central department shall remain responsible for the preparation of the annual accounts and the preparation of the information to be provided to the CSSF.
21. The financial and accounting function shall operate based on written procedures
which aim to:
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60.1. Entries that have a retroactive effect can only be used for regulating purposes.
Entries that have a retroactive effect as well as entries regarding reversals are to be authorised and supervised both within the departments which are at the origin of these entries and within the financial and accounting department.
25. The entire accounting organisation and procedures shall be described in an
accounting procedure manual.
While defining and implementing these procedures, the institutions shall ensure compliance with the principle of integrity (point 12) in order to avoid in particular that the accounting system is used for fraudulent purposes.
Section 5.2.3. IT function
26. “Institutions shall organise their IT function so as to have control over it and to
ensure robustness, effectiveness, consistency and integrity pursuant to point 12. For those purposes, they shall comply with the requirements of Circular CSSF 20/750 on requirements regarding information and communication technology (ICT) and security risk management.”14
27. (…)15
28. Institutions which rely on third parties as regards the IT function shall comply, in
particular, with the conditions laid down in Section 7.4.2.
Section 5.2.4. Internal communication and whistleblower arrangements
29. The internal communication arrangements shall ensure that the strategies, policies
and procedures of the institution as well as the decisions and measures taken by the board of directors and authorised management, directly or by way of delegation, are communicated in a clear and comprehensive manner to all staff members of the institution by taking into account their information needs and 14 Amended by Circular CSSF 20/750. 15 Deleted by Circular CSSF 20/750.
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30. The management information system shall ensure that the management
information is, in normal circumstances and in times of stress, transmitted in a clear and comprehensive manner and without delay to all members of the board of directors, the authorised management and staff of the institution by taking into account their information needs, responsibilities within the institution and the objective to ensure sound and prudent business management.
31. The institutions shall maintain internal whistleblower arrangements which enable
the entire staff of the institution to draw attention to serious and legitimate concerns about internal governance. These arrangements shall respect the confidentiality of the persons who raise such concerns and provide for the possibility to raise these concerns outside the established reporting lines as well as with the board of directors. The warnings given in good faith shall not result in any liability of any sort for the persons who issued them.
Section 5.2.5. Crisis management arrangements
61.1. The crisis management arrangements shall be based on resources (human
resources, administrative and technical infrastructure and documentation) which shall be easily accessible and available in emergencies.
32. The crisis management arrangements shall ensure that, in times of stress, the
credit institutions provide the public with the information referred to in the EBA guidelines published on 26 April 2010 ("Principles for disclosures in times of stress (Lessons learnt from the financial crisis)"). This point shall not apply to investment firms.
33. The crisis management arrangements shall be tested and updated in a regular
basis in order to ensure and maintain its effectiveness.
Sub-chapter 5.3. Internal documentation
62.74. The institutions shall document in writing all central administration and internal
governance arrangements in writing.
This documentation shall relate to the strategies, guiding principles, policies and procedures relating to central administration and internal governance. It shall include in particular a clear and, comprehensive procedure manual which is easily , detailed and accessible tomanual of procedures, whose procedures shall be known by the institution’sentire staff concerned and which is updated on an ongoing basis.
63.75. The description of the procedures forto ensure the proper execution of
activities (transactions) concernsshall concern the following points:
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As the purpose is to ensure that the transactions are properly executed, the procedures’ content should be clear, updated, comprehensive and made known to all relevant employees.
64.76. The institutions shall document, in writing, all their transactions, i.e. any
process which includes a commitment on the part of the institution as well as the decisions relating thereto. The documentation shallmust be updated and kept by the institution in accordance with the law. It should be organised in such a way that it can be easily accessed by any authorised third party. By way of illustrationFor example, as regards credit transactions, full documentation of the decisions to grant, change or terminate credits shall be included in the institution’s files in Luxembourg, as well as the agreements and any documents relating to the follow-up of the debt service and the evolution of the debtor’s financial situation.
65.77. The files, working papers and control reports of the internal control functions,
experts and subcontractors referred to in Sub-chapter 6.2 as well as the long - form reports drawn up by the réviseursréviseur d'entreprises agréé shall be kept during five years in the Luxembourg institution during at least five years, without prejudice to other applicable laws, in order to enable the institution to trackretrace the controls carried out, the identified problems, shortcomings or irregularities identified as well as the recommendations and conclusions. The CSSFcompetent authority as well as the réviseur d’entreprises agréé shallmust always be able to access these documents.
66.78. All transaction orders initiated by the institution and all correspondence with
the customers or their proxies shall be issued by the institution; all correspondence shall be addressed thereto. In the case where the institution has a branch abroad, the latter is the contact point for its own customers. Sub-chapter 5.3. Administrative and technical infrastructure
79. The institution shall have the necessary and sufficient support functions, material
and technical resources to execute its activities.
Section 5.3.1. Administrative infrastructure of the business
functions
80. Each business function must be based on an administrative infrastructure which
guarantees the implementation of the business decisions and their proper execution, as well as compliance with the powers and procedures for the area in question.
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Section 5.3.2. Financial and accounting function
81. The institution shall have a financial and accounting department whose mission is
to assume the accounting and financial management of the institution. Some parts of the financial and accounting function within the institution may be decentralised, provided however that the central financial and accounting department centralises and controls all the entries made by the various departments and prepares the global accounts. The financial and accounting department must ensure that other departments intervene in full compliance with the chart of accounts and the instructions relating thereto. The central department shall remain responsible for the preparation of the annual accounts and the preparation of the information to be provided to the competent authority. In the significant institutions, the CFO shall be selected, appointed and removed from office according to a written internal procedure and with the prior approval of the supervisory body.
82. The financial and accounting function shall operate based on written procedures
which shall provide for:
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83. The institutions shall have a management control which is attached either to the
financial and accounting department or, in the organisation chart, directly to the authorised management of the institution.
84. The tasks carried out within the financial and accounting department cannot be
combined with other incompatible tasks, both business and administrative tasks.
85. In connection with the opening of third-party accounts (balance sheet and offbalance sheet), each institution shall define specific rules on the recording of
accounts in its accounting system. Moreover, it shall specify the conditions for opening, closing and operating these accounts. The institution must avoid having, in its accounting system, a multitude of accounts with uncontrollable items that could lead to the execution of unauthorised or fraudulent transactions; particular attention should be paid to dormant accounts. In this respect, the institution shall put in place appropriate verification and monitoring procedures.
86. The opening and closing of internal accounts in the accounting system must be
validated by the financial and accounting department. In case of opening of accounts, this validation must take place before these accounts become operational. The institution shall set out rules concerning the use of such accounts and the powers relating to their opening and closing. The financial and accounting department shall ensure that the internal accounts are periodically subject to a procedure which justifies their need. It is necessary to ensure that internal accounts and payable-through accounts are not kept open where they would no longer be in line with the use defined by the set rules.
87. Entries that have a retroactive effect can only be used for regulating purposes.
Entries that have a retroactive effect as well as entries regarding reversals are to be authorised and supervised by both the departments which are at the origin of these entries and the financial and accounting department.
88. The entire accounting organisation and procedures shall be described in a manual
of accounting procedures.
While defining and implementing these procedures, the institutions shall ensure compliance with the principle of integrity in order to avoid, in particular, that the accounting system is used for fraudulent purposes.
Section 5.3.3. IT function
89. The institutions shall organise their IT function so as to have control over it and
to ensure robustness, effectiveness, consistency and integrity pursuant to
Chapter 3 of this part. For those purposes, they shall comply with the
requirements of Circular CSSF 20/750 on requirements regarding information and communication technology (ICT) and security risk management.
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90. The institutions, which rely on third parties as regards the IT function, shall
comply, in particular, with the conditions laid down in Sub-chapter 7.4 of this
part.
Section 5.3.4. Communication and internal and external alert
arrangements
91. The internal communication arrangements shall ensure that the strategies,
policies and procedures of the institution as well as the decisions and measures taken by the management body, directly or by way of delegation, are communicated in a clear and comprehensive manner to all staff members of the institution, considering their information needs and their responsibilities within the institution. The internal communication arrangements shall enable staff to have easy and constant access to this information.
92. The management information system shall ensure that all management
information is, in normal circumstances and in times of stress, transmitted, in a clear and comprehensive manner, and without delay, to all members of the management body and staff of the institution, considering their information needs, their responsibilities within the institution and the objective to ensure a sound and prudent business management.
93. The institutions shall maintain internal alert arrangements (whistleblowing) which
shall enable the entire staff of the institution to draw attention to legitimate concerns about internal governance or internal and regulatory requirements in general. These arrangements shall respect the confidentiality and identity of the persons who raise such concerns and provide for the possibility to raise these concerns outside the established reporting lines as well as within the supervisory body. The alerts issued in good faith shall not result in any liability or adverse impact of any sort for the persons who issued them.
94. The CSSF has also made a tool and a procedure to report incidents directly to it
available on its website.
(https://whistleblowing.apps.cssf.lu/index.html?language=fr).
Section 5.3.5. Crisis management arrangements
95. The crisis management arrangements shall be based on resources (human
resources, administrative and technical infrastructure and documentation) which shall be easily accessible and available in emergencies.
96. The crisis management arrangements shall ensure that, in times of stress, the
credit institutions provide the public with the information referred to in the CEBS guidelines published on 26 April 2010 (“Principles for disclosures in times of stress (Lessons learnt from the financial crisis)”).
97. The crisis management arrangements shall include a recovery plan which shall
comply with the requirements of Chapter 2 of Part IV of the LFS.
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98. The crisis management arrangements shall be tested and updated, on a regular
basis, in order to ensure and maintain its effectiveness.
Chapter 6. Internal control
67.99. The internal control isshall be a control system composed of rules and
procedures which aim to ensure that the objectives set by the institution are reached, the resources are economically and effectively used, the risks are controlled and the assets and liabilities are protected, the financial and management information is accurate, comprehensive, relevant, understandable and available without delay, the laws and regulations as well as the internal policies and procedures are complied with and that the applicationsrequests and requirements of the CSSFcompetent authority are met.16.
34. A suitableThe internal control environment requiresarrangements of an
institution must be adapted to its organisation and to the implementation of the following controls:
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The third line consists of the internal audit function which makes an independent, objective and critical assessment of the two first lines of defence and of the internal governance arrangements as a whole.
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Sub-chapter 6.2. Internal control functions 72.104.The policies implemented with respect to risk control, compliance and internal audit pursuant to point 18 shall provide for three distinct internal control functions: on the one hand, the risk control function and the compliance function which are part of the second line of defence and on the other hand, the internal audit function which is part of the third line of defence (cf. point 9).. Moreover, these policies whichshall describe the fields of intervention directly related to each internal control function shall, clearly define the responsibilities for the common fields of intervention andin order to avoid redundancies and conflicts of powers, and define the objectives as well as the independence, authority, objectivity and permanence of the internal control functions.
35. Each internal control function shall be under the responsibility of a separate head
of the function who shall be appointed and revoked in accordance with an internal written procedure. Where, in application of the principle of proportionality, a single member of the authorised management performs compliance and risk control functions, this person shall combine, as an exception to the foregoing, the positions of head of the compliance function and risk control function (cf. also point 72). The appointments and revocations of the persons in charge of the internal control functions shall be approved by the board of directors and reported in writing to the CSSF in compliance with the prudential authorisation procedure of key function holders as published by the CSSF on its website. The persons in charge of the three internal control functions shall be responsible vis-à-vis the authorised management and ultimately vis-à-vis the board of directors for the performance of their mandate. In this respect, these persons shall be able to contact and inform, directly and on their own initiative, the chairman of the board of directors or, where appropriate, the members of the audit committee. The persons in charge of the internal control functions are referred to as Chief Risk Officer for the risk control function, Chief Compliance Officer for the compliance function and Chief Internal Auditor for the internal audit function.
Section 6.2.1. General responsibilities of the internal control
functions
73.105.The main purpose of the internal control functions isshall be to verify compliance with all the internal policies and procedures which fall within the area for which they are responsible, to regularly assess their suitability as regardsadequacy with respect to the organisational and operational structure, the strategies, the activities and the risks of the institution as well as as regardswith respect to the applicable legal and regulatory requirements, and to report directly to the authorised management as well as the board of directors pursuant to point 116.to the supervisory body and, where appropriate, to the specialised committees. They shall provide the authorised management and the board of directorssupervisory body, and, where appropriate, the specialised committees with the opinions and advice they deem necessary in order to improve the central administration and internal governance arrangements of the institution. useful or which are requested by these bodies or committees.
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74.106.The internal control functions shall respond as soon as possible to the requests for advice and opinions from the authorised management and the board of directors or, where appropriate, the specialised committees. If Where they consider that the effective, sound or prudent business management is challengedcompromised, the persons responsible forheads of the internal control functions, shall promptly inform, on their own initiative, the authorised management and the board of directorssupervisory body or, where appropriate, the specialised committees in accordance with the applicable internal procedures. 75.107.Where the institution is the group head, its internal control functions shall supervise and control the internal control functions of the different entities of the group. The internal control functions of the institution shall ensure that the problems, shortcomings, irregularities and risks identified throughout the whole group are reported to the local management and supervisory bodies and boards of directors as well as to the authorised management and board of directors ofto the institution pursuant to point 116supervisory body of the group head.
Section 6.2.2. Characteristics of the internal control functions
76.108.The internal control functions shall be permanent and independent functions each with sufficient authority. The persons in chargeheads of these functions shall have direct access right to the board of directorssupervisory body or its chairmanchairperson or, where appropriate, the chairmen ofto the specialised committees which are part of it, to the réviseur d’entreprises agréé of the institution as well as to the CSSFcompetent authority. The independence of the internal control functions is incompatible with the situation in whichwhere:
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77.109.The authority which the internal control functions must have, requires that these functions should be able to exercise their responsibilities, on their own initiative, express themselves freely and access all external and internal data and information (in all the institution’s business units of the institution they control) deemedthey deem necessary to fulfil their missions. 78.110.The staff of The internal control functions or third parties (cf. point 118) acting on behalf of these functions shallmust be objective inwhen carrying out their work. In order to ensure objectivity, the persons in chargeheads of the internal control functions shall exercisebe independent thinking and judgementminded: they shouldmust not make their own judgement conditional upon that of other persons including, in particular, those controlled and shall ensure to avoid conflicts of interest. Objectivity also requires that conflicts of interest are avoided. 79.111.In order to ensure the effectiveness The members of the internal control functions, its members shall must, individually and collectively, possess high professional knowledge, skills and experience in the field of banking and financial activities and , especially in their field of responsibility with respect to applicable standards. This competence shall be assessed by taking into account both the nature of In accordance with the principle of proportionality, the required skill level shall increase with the missionsorganisation of the associatesinstitution and the nature, scale and complexity and diversity of the activities carried out by the institution in order to enable thorough coverage of the activities and risks. ThisThe individual competence shallskill must include the ability to make critical judgements and to be heard by the authorised managers of the institution. The internal control functions shall update the acquired knowledge and organise ongoing training which is adapted to each of the associates. In addition to their high professional experience, the persons in chargeheads of the internal control functions, who take on such a position for the first time, shall have the necessary theoretical knowledge that enables them to effectively perform this function. 80.112.In order to guarantee the execution of the tasks assigned to them, the internal control functions shall have the necessary and sufficient human resources, infrastructure and budgets, pursuant tobudget, in keeping with the principle of proportionality (point 4).. The budget shallmust be sufficiently flexible to reflect an adaptation of the missions of the internal control functions in response to changes ofin the institution’s risk profile. These provisions are compatible with the outsourcing oforganisation, the activities and risks or upon the internal audit function and the use of internal control functions to external experts pursuant to points 117 and 118. occurrence of specific events.
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81.113.The scope of intervention of the internal control frameworkfunctions shall cover the whole institution within the limits of itstheir respective competences. It shall include the non-standard and potentially non-transparent activities referred to in Section 7.1.1. 82.114.Each institution shall take the necessary measures to ensure that the members of the internal control functions perform their functions with integrity and discretion.
Section 6.2.3. Execution of the internal control
functions’functions' work
83.115.The internal control functions shall document the work carried out in accordance with the assigned responsibilities, in particular in order to allow trackingretracing the interventions as well as the conclusions reached. 84.116.The internal control functions shall report, in writing, on a regular basis and, if necessary, on an ad hoc basis, to the authorised management and the supervisory body or, where appropriate, to the specialised committees. These reports shall concern the follow-up ofto the recommendations, problems, shortcomings and irregularities identifiedfound in the past as well as the new identified problems, shortcomings and irregularities identified. Each report shall specify the risks related thereto as well as their seriousness (measurement ofseverity (measuring the impact) and shall propose corrective measures, as well as in general the position of the persons concerned. Each internal control function shall prepare, at least once a year, a summary report on its activities and its operation. covering all the activities assigned to it. As regards the activities, each summary report shall include a statement of the function’s activities carried out since the last report, the main recommendations to the authorised management of, the main recommendations on (existing or emerging) problems, significantthe major shortcomings and irregularities found since the last report, and the measures taken in this respect as well as the statement of the significant problems, shortcomings and irregularities identified in the last report but which have not yet been the subject ofto appropriate corrective measures. The report shall also provide information on the activities linked to the other responsibilities of the control function, including those defined in Sections 6.2.5, 6.2.6 and 6.2.7. Finally, the report shall indicate the state of their control area as a whole. As far as operation is concerned, the report shall mention, in particular, comment on the adequacy of the internal human and technical resources, and the nature and level of reliance on external experts pursuant to point 118human and technical resources as well as on any problems which may have occurred in this context. This report shall be submitted for approval to the board of directors and, where appropriate,supervisory body or the competent specialised committees for approvalto ensure its follow-up and that the supervisory body is informed; it isshall be submitted for information to the authorised management for information.
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Pursuant to point 107, In case of serious problems, shortcomings and irregularities, the persons in chargeheads of the internal control functions shall immediately inform the authorised management, the chairmanchairperson of the board of directorssupervisory body and, where appropriate, the chairpersons of the specialised committees thereof. In such cases, the CSSF recommends that the persons in chargeheads of the internal control functions aremay request to be heard by the specialised committees in a private meeting. The internal control functions shall verify the effective follow-up of the recommendations relating to the problems, shortcomings and irregularities identified in accordance with the procedure laid down in the third paragraph of point 57. They shall report, on a regular basis, on this subject to the authorised management on a regular basis.
Section 6.2.4. Organisation of the internal control functions
117.Each internal control function shall be under the responsibility of a separate head of the function who shall be selected, appointed and dismissed in accordance with a written internal procedure. The appointments and removals of the heads of the internal control functions shall be approved beforehand by the supervisory body and reported in writing to the competent authority in accordance with the Prudential Procedure as published by the CSSF on its website. 118.The heads of the three internal control functions shall be responsible vis-à-vis the authorised management and, ultimately, vis-à-vis the supervisory body for the performance of their mandate. In this respect, these heads must be able to contact, directly and on their own initiative, the chairperson of the supervisory body or, where appropriate, the competent specialised committee. The heads of the three internal control functions shall be referred to as Chief Risk Officer for the risk control function, Chief Compliance Officer for the compliance function and as Chief Internal Auditor for the internal audit function. 119.Outsourcing of the compliance function and risk control function is not authorised. The operational tasks of the internal audit function canmay be outsourced by smallersmall institutions whose risk profile is with a low and non-complex, subject to the conditions laid down in point 118 and Sub-section 6.2.7.4. This kind of risk profile. Such outsourcing is not, in principle, not acceptable for institutions with agencies, branches or subsidiaries. The supervisory body of the institution shall remain ultimately responsible for outsourcing the internal audit operational tasks. External providers entrusted with the outsourced internal audit operational tasks shall depend on and report directly to the member of the authorised management in charge of internal audit. They shall have direct access to the supervisory body or, where appropriate, the chairperson of the audit committee.
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85.120.The provisions of the preceding point 112 doshall not exclude the possibility for the internal control functions to use the expertise and human or technical resourcesmeans of third parties (belonging or not to the same group as the institution) for certain aspects. This use isshall be governed by an internal procedure which shallmust allow, in particular, enable the authorised management and the board of directorssupervisory body to assess the dependencies and risks for the institution arising from which a significant use of these third parties.external resources might pose for the institution. The authorised management shall select these third parties ("experts") on the basis of external resources based on an analysis of suitabilitycorrelation between the institution’s needs and services, the level of objectivity and independence, and the specific services and competencesskills offered by these third parties. The selected expert shall which must be independent from the institution’s réviseur d'entreprises agréé(statutory auditor) and the cabinet de révision agréé as well as(approved audit firm) and from the group to which these personsparties belong. to. The supervisory body shall approve the external resources selected by the authorised management. 86.121.TheAny use of an external expert shallresources must be based on a written mandate. The expertThese third parties shall carry out his/hertheir work in complianceaccordance with the regulatory and internal provisions (including the internal audit and compliance charters) which are applicable to the internal control function and the area of control in question. The expert shall They must be placed under the dependenceauthority of the person in chargehead of the internal control function covering the controlled area. This person superviseshead shall supervise the experts' work. of these third parties. 122.Pursuant to point 3, the internal control functions of an institution shall Where the institution can demonstrate, in accordance with the principle of proportionality, that there is no justification for setting up a distinct risk control function and a compliance function or for appointing two heads of these functions full time, the institution may set up a combined function or a position with combined responsibility, subject to prior approval of the competent authority. However, the application of the principle of proportionality may not result in the accumulation of other responsibilities for a person already combining the responsibility for the risk control function and the compliance function. The institution wishing to create a combined risk control and compliance function, allocate the responsibilities for these two functions to one single person or combine one of these responsibilities with other tasks must submit a request to the competent authority which shall include:
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Pursuant to the principle of proportionality, the institution which created three permanent and independent internal control functions may decide not to set up individual internal control functions in the legal entities or branches of the group which are limited in size and activities. In this case, the institution shall ensure that its internal control functions carry out regular and frequent controls, including annual on-site inspections of these entities. Where the institution is not athe parent undertaking within the meaning of point 3, the institution, it shall seek to obtain a summary of the reports of the internal control functions of the legal entities in question and have them analysed by its own internal control functions. They shall report the major recommendations, main problems, shortcomings and irregularities identified, agreed corrective measures and the effective follow-up of these measures in accordance with point 116. In accordance with point 4, the institution can relinquish the option of putting in place own internal control functions within legal entities or branches of the group. In this case, the institution shall ensure that its internal control functions carry out controls, including on-site inspections on these entities on a regular basis. 89.126.The principles of this Circular doshall not exclude that, for Luxembourg institutions which are, whether or not branchthey are branches or subsidiarysubsidiaries of Luxembourg financial professionals having internal control functions at the level of these professionals, the internal control functions are functionally linked to those of the professional in question.
Section 6.2.5. Risk control function
Sub-section 6.2.5.1.
Comments:
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3. The risk control function shall submit a copy of its summary annual report to
the CSSF (points 116 and 210). Pursuant to point 116, this report includes the current state of risks and thus possibly duplicates the ICAAP report (point 61) drawn up by the authorised management for the board of directors. The risk of duplication exists, especially considering that, in general, the risk control function is associated with the drafting of the ICAAP report. For the sake of avoiding any undue duplication between the ICAAP report and summary report of the risk control function, it is sufficient, for the risk assessment in line with the ICAAP, that the risk control function makes reference to the ICAAP report in its summary report, insofar as it shares the risk descriptions and analyses included therein. Where it does so, the risk control function shall nevertheless issue, in its summary report, its own conclusions drawn from the aforementioned descriptions and analyses. The summary report shall then deal exclusively with the other areas referred to in point 116. However, when the risk control function does not share the aforementioned descriptions and analyses, it shall explicitly mention it in its summary report in which it includes its own assessments.
4. Another possible duplication field exists in respect of the segregation of duties
between the compliance function in charge of the risk compliance (point 131) and the risk control function in charge of "all risks" (point 123). The institutions shall ensure that these tasks are internally assigned in an effective and efficient way.
36. The risk control function is entrusted to a dedicated department composed of
one or several persons.
90.127.The risk control function is in charge of the anticipation, identification, measurement, monitoring, control and reporting of all business units anticipate, identify, assess, measure, monitor, manage and duly report all the risks to which the institution is or may be exposed. Thus, it shall It shall carry out its tasks continuously and without delay. It shall be a central element of the internal governance and organisation of the institution dedicated to limiting risks. It shall inform and advise the supervisory body and assist the authorised management, propose improvements in the risk management in limiting framework and actively participate in the decision-making processes, ensuring that appropriate attention is given to risk considerations. The ultimate responsibility for the decisions regarding risks shall remain, however, with the business units which take the risks. It shall ensure that the risks are properly managed and, finally, with the authorised management and supervisory body. Thus, the term “risk control function” shall not reduce this function to a simple ex-post “control” of the limits. These tasks are to be performed on an ongoing basis and without delay.
91.128. The fieldscope of intervention of the risk control function shall also
includecover the whole institution, including the risks associated with the complexity of the institution’s legal structure of the institution and the relationships of the institution with related parties.
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Sub-section 6.2.5.1. Specific responsibilities and scope of the risk control function 92.129.The risk control function shall ensure that the regulatory and internal risk objectives and limits are robust and compatible with the regulatory framework, the internal strategies, and policies, the activities, and the organisational and operational structure of the institution. It shall monitor compliance with these objectives and limits and the proper application, propose appropriate remedial measures in case of breach, ensure compliance with the escalation procedure provided for in case of significant breach and shall ensure that the breaches are remedied as soon as possible. 93.130.The head of the risk control function shall ensure that the authorised management and the board of directorssupervisory body receive aan independent, comprehensive, objective and relevant overview of the risks to which the institution is or may be exposed17. This overview shall include, in particular, an assessment of the correlation between these risks and the own funds and liquidity (reserves) and the institution’sinstitution's ability to manage these risks in normal times and in times of stress. This assessment shall be based, in particular, on the stress test programme in accordance with Circular CSSF 11/506. It shall also include an assessment as regardsof the correlation between the risks incurred and the strategies laid downrisk appetite defined by the board of directorssupervisory body. The frequency of this communication shall be adapted to the institution’s characteristics and needs, in particular regarding the risk tolerance. view of its business model, the risks incurred and its organisation. The summary annual report of the risk control function, a copy of which shall be provided to the competent authority, possibly duplicates elements of the ICAAP and ILAAP report. The risk control function may therefore refer to the ICAAP and ILAAP report in its summary report, provided that it agrees with the descriptions and analyses of risks contained therein. In case of disagreement, the risk control function shall provide its own assessments and conclusions in its summary report. 94.131.The risk control function shall ensure that the terminology, methodsmethodology and technical resources used for the risk anticipation, identification, measurement, reporting, management and monitoringcontrol are consistent and effective. 95.132.The risk control function shall ensure that the qualitative and quantitative risk assessment is based on conservative assumptions and on a range of relevant scenarios, in particular regarding dependencies between risks. The Quantitative assessments are toshall be validated by qualitative (assessment methods and expert) judgements based on structured and documented analyses. 17 In line with “Principles for effective risk data aggregation and risk reporting” (BCBS 239) of January 2013.
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The risk control function shall inform the authorised management and supervisory body of the assumptions, limits and possible deficiencies of the applied analyses and models and must regularly compare its ex-ante possible risk assessments of the possible risks measured with the ex-post materialised risks on a regular basis in order to improve the adequacyaccuracy of its assessment methods (backtesting). 96.133.The risk control function shall strive to anticipate and recognise the risks arising in a changing environment. In this respect, it shall also monitor the implementation of the changes in the activities (“New Product Approval Process”) in order to guarantee that the associated risks relating thereto remain controlled. under control. Sub-section 6.2.5.2. Organisation of the risk control function
37. Where, pursuant to the principle of proportionality (point 4), the creation of a
full-time position of Chief Risk Officer is not necessary, a person may be entrusted with this position on a part-time basis. It is appropriate to ensure that the other tasks performed by this employee remain compatible with the responsibilities incumbent upon him/her pursuant to the provisions of this circular.
134. The institution which is not willing to create a full-time position of The
institutions shall create a permanent and independent risk control function, considering the principle of proportionality and the criteria governing its application as well as the considerations regarding the organisation of the internal control functions laid down in Section 6.2.4. Where the organisation of an institution, the scale and complexity of its activities or even the incurred risks justify setting up satellite risk control or compliance functions within the business units, the institution must nevertheless set up a central risk control function to which the different satellite functions shall report. This central function shall manage the consolidated overview of risks and ensure compliance with the defined risk strategies and appetite. 135.Within the significant institutions, the head of the risk control function shall be a member of the authorised management who is independent and individually responsible for the risk control function. Where the principle of proportionality does not require such an appointment, another member of the senior management of the institution may assume that function, provided there is no conflict of interest. 136.The head of the risk control function must be able to challenge the decisions of the authorised management. These challenges and the reasons cited must be documented by the institution. Where the institution gives a veto right over the decisions of the authorised management to the Chief Risk Officer, the scope of this right must be decided clearly and in writing, including the escalation process of the supervisory body.
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The decisions which were given a reasoned negative opinion by the Chief Risk Officer shall inform the CSSF by stating the grounds of its should be subject to an enhanced decision-making process. It is acceptable for the member of the authorised management designated as being directly in charge of the risk control function to assume himself/herself the position of Chief Risk Officer.
Section 6.2.6. Compliance function
This Circular comprises the “general guidelines” contained in the ESMA Guidelines on certain aspects of the MiFID compliance function requirements (ESMA/2012/388) and applies them to all the activities of the institution, including the provision of investment services. Where the institutions implement these requirements in relation to investment services within the meaning of the LFS, they shall take into account the "supporting guidelines" set out in Guidelines ESMA/2012/388. Comments:
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Sub-section 6.2.6.1. Compliance charter
97.137.The terms of operationoperational arrangements of the compliance function in terms of objectives, responsibilities and powers areshall be laid down in a compliance charter drawn up by the compliance function and approved by the authorised management and ultimately by the board of directors. supervisory body. 98.138.The compliance charter shallmust at least:
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Sub-section 6.2.6.2. Scope and specific responsibilities and scope of the compliance function 140.The aim of the compliance function is to anticipate, identify, assess, report and monitor the compliance risks of an institution as well as to assist the authorised management in providing the institution with measures to comply with the applicable laws, regulations and standards. The compliance risks may include a variety of risks such as the reputational risk, legal risk, risk of dispute, risk of sanctions, as well as some other operational risk aspects, in connection with all the institution’s activities. These tasks shall be performed on an ongoing basis and without delay.
100.141. For the purposepurposes of reaching the objectives set, the
responsibilities of the compliance function shallmust cover at least the following aspects:
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101.142. The compliance function shall verify compliance with the compliance
policy and procedures, on a regular basis, and isshall be in charge of the adaptation proposals, if required. To this end, the compliance function shall assess and control the compliance risk, on a regular basis., in the context of a structured monitoring programme. In respect of the compliance risk controls as well asand the verification of the procedures and instructions, the provisions of this Circular doshall not prevent the compliance function from taking into account the internal audit work.
102.143. The compliance function shall centralise all information on the
compliance problems (inter alia infringementsinternal and external frauds, breaches of standards, non-compliance with procedures and limits or conflicts of interest) identified by the institution. InsofarIn so far as it did not obtain this information onas part of its own involvement, it shall examine relevant documents, whether internal (for instance, control reports and internal audit reports, reports or statements of the authorised management or, where appropriate, the board of directorssupervisory body) or external (for instance, reports of the external auditorréviseur d'entreprises agréé, correspondence from the supervisory authority).
103.144. The compliance function shall assist and advise the authorised
management on issues of compliance and applicable laws, regulations and standards, notably by drawing its attention to changes in standards which may subsequently have an impact on the compliance area.
104.145. The compliance function shall raise awareness of the staff about the
significance of compliance and related aspects and assist them in their day-today operations. related to compliance. To this end, it shall also develop an ongoing training programme and ensure its implementation.
105.146. The Chief Compliance Officer isshall be the key contact person of the
competent authorities in relation to the fight against money laundering and terrorist financing, for any question in this respect as well as in relation to market abuse. It isshall also be in charge of the transmission of any information or statementreport to these authorities. Sub-section 6.2.6.3. Organisation of the compliance function
40. Where, pursuant toThe institutions shall create a permanent and independent
compliance function, considering the principle of proportionality (point 4), the creation of a full-time position of Chief Compliance Officer is not necessary, a person may be entrusted with this position on a part-time basis. It is appropriate to ensure that the other tasks performed by this employee remain compatible with the responsibilities incumbent upon him/her pursuant to the provisions of this circular.
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The institution which does not want to create a full-time position of Chief Compliance Officer, shall obtain explicit permission from the CSSF. To this end, the authorised management and the chairman of the board of directors shall submit to the CSSF a written request providing the grounds as well as the necessary information to enable to assess that the correct and the criteria governing its application of the provisions of this circular and the proper performance of the compliance function remain assured. Subject to specific authorisation by the CSSF, the member of the authorised management directly as well as general considerations regarding the organisation of the internal control functions laid down in charge of the compliance function himself/herself may take up the position of Chief Compliance Officer himself/herselfSection 6.2.4.
Section 6.2.7. Internal audit function
41. The internal audit function is entrusted with the internal audit department,
composed of one or several persons.
42. The audit function shall constitute within the organisation of the institution an
independent and permanent function of critical assessment of the adequacy and effectiveness of the central administration, internal governance and business and risk management as a whole in order to assist the board of directors and authorised management of the institution and to enable them to best control their activities and the risks related thereto and thus to protect its organisation and reputation. Sub-section 6.2.7.1. Internal audit charter
106.147. The terms of operationoperational arrangements of the internal audit
function in terms of objectives, responsibilities and powers shallmust be laid down byin an internal audit charter drawn up by the internal audit function and approved by the authorised management confirmed, where appropriate, by the audit committee, and ultimately approved by the board of directorssupervisory body. The internal audit charter shallmust at least:
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107.148. In addition to points 110 to 112, The internal audit department
hasshall have a sufficient number of staff and hashave the required skills as a whole to cover all activities of the institution. The internal auditors shallmust have sufficient knowledge of the audit techniques. In order not to challengejeopardise their independence of judgement, the persons responsible forfrom the internal audit cannot be in charge of the preparation orand establishment of elements of the central administration and internal governance arrangements. This principle doesshall not prevent them from taking part in the implementation of sound internal control mechanisms through opinions and recommendations which they provide in this respect (cf. in particular point 107).. Moreover, in order to avoid conflicts of interest, a rotation of the control tasks assigned to the various internal auditors shouldshall be ensured, where possible, and it should be avoided that the auditors hired within the institution controlaudit the activities or functions which they used to perform themselves recently. Sub-section 6.2.7.2. Specific responsibilities and scope of the internal audit function
108.149. In general, The internal audit function shall reviewexamine and assess
whether the central administration and internal governance arrangements are adequate and operate effectively. In this respect, the internal audit function shall assess inter alia: , among others (non-exhaustive list19), the following in accordance with the organisation and the nature, scale and complexity of the activities:
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Sub-section 6.2.7.3. Execution of the internal audit work
111.152. All internal audit missions shall be planned and executed in accordance
with an internal audit plan. The plan shall be established by the person in chargehead of the internal audit function for a period of several years (in general three years). Its purpose isshall be to cover all activities and functions, taking into accountconsidering both the risks posed by an activity or function of the institution and the effectiveness of the organisation and internal control in place for this activity or function. (risk-based approach). The plan shouldshall consider the opinions issued by the board of directors andsupervisory body or, where appropriate, the audit committee, as well as the authorised management. The plan shall cover all matters of prudential interest (including the CSSF’s commentscompetent authority’s observations and requests) and shall also reflect the developments and innovations provided for as well as the risks which may arise therefrom.
112.153. The plan shall be discussed with the authorised management and
submitted to the authorised management and approved by it, confirmed, where appropriate, bywith the audit committee and ultimately approved by the board of directors.supervisory body. It shall be reviewed, on an annual basis, and adapted, where appropriate, in light of the to developments and emergencies. Any adaptation is toThe plan shall be formallyreviewed by the authorised management and, where appropriate, by the audit committee before being approved by the authorised management and, where appropriate, the audit committeesupervisory body. The approval implies that the authorised management provides the internal audit department with the means necessary to implement the internal audit plan. In its summary report to the board of directors in accordance with point 116supervisory body, the internal audit shall indicate and state the reasons for the main changes brought to the audit plan as initially approved by the board of directorssupervisory body: cancelled missions, delayed missions as well as the missions whose scope washas significantly changed.
113.154. The plan, which is adequately documented, shall set out the objectives
of each mission and the scope of the tasks to be executed, give an estimate of the necessary time and human and material resources and assign an audit frequency to each missionactivity and risk. The internal audit plan shall also provide for the adequate and sufficiently frequent coverage, within a multi-year planning period of several years, of important or complex activities which representwith a potential significant potential risk, including a reputational risk. It shall focus on the risk of execution errors and the risk of fraud. The internal audit plan shall provide for adequate coverage of areas with a risk of money laundering or terrorist financing, so that the internal audit may give an account of the compliance with the policy regarding the fight against money laundering or terrorist financing in its summary report on an annual basis.
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114.155. Where the internal audit department of the parent undertaking of the
Luxembourg institution carries out on-site inspections onof its subsidiary, on a regular basis, it is recommended for reasons of effectiveness, that, insofarin so far as possible, the Luxembourg institution coordinates its internal audit plan with that of the parent undertaking.
115.156. The internal audit department shall regularly inform the authorised
management and, where appropriate, the audit committee on the implementation of the internal audit plan.
116.157. Each internal audit mission shall be planned, executed and
documented in compliance with the professional standards adopted by the internal audit function in its internal audit charter.
117.158. Each mission shall be the subject toof a written report of the internal
audit department, in general, intended for the supervisedaudited persons, the authorised management as well as - possibly in summarised form - for the board of directors supervisory body (and, where appropriate, the audit committee) in accordance with point 116.). The reports shall also be made available to the réviseur d'entreprises agréé and the CSSF.competent authority. These reports shall be writtendrafted in French, German or English. The internal audit department shall prepare a table of the internal audit missions and the written reports related thereto. It shall draft, at least once a year, a summary report pursuant to point 116. Sub-section 6.2.7.4. Organisation of the internal audit function
44. The institution which, in line with point 117, decides to outsource the internal
audit function, shall submit a written request to the CSSF. This request shall include the information necessary for its assessment, including, in particular, the name of the external expert (natural person) who will take on the internal audit function of the institution. The choice of the external expert, who carries out the internal audit work shall be approved by the board of directors, where appropriate, based on the opinion of the audit committee created in compliance with point 33. The selected expert shall be independent from the réviseur d'entreprises agréé and the cabinet de révision agréé of the institution as well as from the group to which these persons belong. It shall carry out the tasks in accordance with point 118 and mutatis mutandis the provisions of this circular. In this respect, it shall take over all duties and responsibilities incumbent upon the internal audit under this circular. 159.In case of use of an external expert for certain aspects in accordance with point 118, this expert shall carry out his/herThe institutions shall create a permanent and independent internal audit function, considering the principle of proportionality and the criteria governing its application as well as the considerations regarding the organisation of the internal control functions laid down in Section 6.2.4.
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118.160. In case the operational tasks of the internal audit are outsourced, the
external providers shall carry out their work under the internal audit plan of the institution by following a work programme, by producing detailed documentation on his/hertheir work and by drafting the reports for each mission. These reports are toshall be drafted in French, German or English and to be delivered to submitted to the designated head of the Chief Internal Auditorfunction, the authorised management, where appropriate, the audit committee and the board of directors according to point 116supervisory body.
45. Pursuant to point 118, the external experts may be internal auditors of the group
to which the institution belongs. Where experts act as réviseurs d'entreprises agréés, they shall, in all respects, be independent from the réviseur d'entreprises agréé and the cabinet de révision agréé of the institution as well as the group to which these persons belong.
Chapter 7. Specific requirements
Sub-chapter 7.1. Organisational structure and legal entities (Know-yourstructure)
46. The organisational structure shall be, in terms of legal entities (structures)), be
appropriate and justified as regards the strategies and guiding principles referred to in point 17 of this circular. 161.. It shall be clear and transparent for all the stakeholders. The legal, organisational and operational structure must enable and promote effective, sound and prudent business management. It shallmust not impede the abilitysound governance of the institution, in particular the ability of its administration andthe management bodiesbody, to effectively manage and controloversee the activities (and the risks) of the institution and the different legal entities which are part of it. The group head institution shall clearly define and limitdelineate the powers which it agrees to delegate to the headsmanagers of the legal entities which are part of the group in order to make sure that the group headparent undertaking can monitor their activity, on an ongoing basis, and that it is involved in any transaction of a certain importance.
119.162. The guiding principles that the board of directorssupervisory body lays
down as regards the organisational structure (in terms of legal entities) shall provide notably that:
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123.166. The policy on managingthe management of conflicts of interest shall
provide that all current and possible conflicts of interest shallmust be identified with the aim of avoiding them, assessed, managed and mitigated or avoided. Where conflicts of interest remain, the policy in this respect shall lay down the procedures to be followed in order to report, document and manage them in the interest ofso as to avoid that the institution, its counterparties and pursuant to the regulatory provisions on customer protection.the customers suffer unjustified consequences thereof. The policy and procedures in question shall also lay downinclude the procedure to be followed in case of non-compliance with thethis policy in question.
124.167. The policy on managing the management of conflicts of interest shall
identifyprovide for the identification of the main sources of conflicts of interest - potentially affected relationships and activities as well as all internal and external parties involved - with which the institution isor its staff and its representatives are or may be faced and. It shall state how these take into consideration not only present situations and events which may result in conflicts of interest shall be managed. In order to minimise, but also those in the recent past in so far as these events continue to have a potential of conflicts of interest,impact on the institution or person concerned. The institution shall determine the materiality of the identified conflicts and shall put in place appropriate segregation of duties and activities.decide how they must be managed. 168.In order to minimise the possible conflicts of interests, the institution shall set up an appropriate segregation of duties and activities, including through the management of information access and the use of Chinese walls.
125.169. The policy in question shall also determine the reporting and escalation
procedures applicable within the institution. Where the staff members are or have been faced with a conflict of interest, they shall promptly inform their senior manager on their own initiative. Where the senior manager notes that the conflict of interest is acceptable in view of the internal policy, s/he shall authorise it under the terms and conditions provided for in this policy. The policy in question shall also lay down the escalation procedure which determines the conflicts of interest which shall be reported to the authorised management and authorised by it.
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The members of the authorised management and the board of directorssupervisory body, who are subject to a conflict of interest, shall promptly inform the authorised management or the supervisory board of directors, respectively, on their own initiative. The procedures in this regard shall provide that these members shall abstain from participating in the decision-making processes where they may have a conflict of interest or which prevent themwhere they are prevented from deciding with full objectivity and independence.20
126.170. The internal control functions areshall be in charge of identifying and
managing conflicts of interest.
Section 7.2.1. AdditionalSpecific requirements relating to the
conflicts of interest involving related parties
127.171. The business relationshipstransactions with related parties areshall be
subject to the board of directors’supervisory body's approval where they have or may have, individually or on an aggregate basis, a significant and negative impact on the risk profile of the institution. The rule shall also apply where, in the absence of any significant impact on each individual transaction, the influence is significant for all transactions with related parties.
128.172. Any material change in the significant transactions carried out with
related parties shallmust be brought to the attention of the board of directorssupervisory body as soon as possible.
129.173. Transactions with related parties shallmust be carried out in the
interest of the institution. The institution’s interest is not met where transactions with related parties:
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130.174. Where the institution is group head, it shall consider, in a balanced
way and balancein compliance with the applicable legal provisions, the interests of all legal entities and branches which are part of the group and comply with the applicable legal provisions.. It shall consider how these interests contribute to the common purposeobjectives and interests of the group over the long term. Sub-chapter 7.3. New Product Approval Process
131.175. "New products" The new product approval process shall mean any
change incover the development of new activities (in terms of coverage ofproducts, services, markets, systems and processes or customers, products and services). as well as their material changes and exceptional transactions.
48. No new activity shall be undertaken unless approved by the authorised
management, all relevant parties have been heard, and the means mentioned in point 179 are available. The process in question is laid down in a new product approval process which complies with the provisions of points 177 to 180. It must ensure that any new product remains consistent with the guiding principles established by the supervisory body, the risk strategy, the risk appetite of the institution and the corresponding limits.
132.176. The new product approval process shall define, in particular, the
changes in the activities subject to the approval process (significant change in the activities), the considerations to be taken into account, the main issues to be addressed as well as the implementation of the approval process, including the responsibilities of all the parties concerned. The approval process shall lay down the rights and obligations of all relevant parties, including the internal control functions as well as the conditionsmain issues to be fulfilled for approval. These conditionsaddressed shall include regulatory compliance, accounting, pricing and models, the impact on risk control, internal expertise, technical infrastructure and sufficient humanprofile, capital adequacy and profitability, the availability of adequate front, back and middle office resources and the availability of adequate internal tools and expertise to ensureunderstand and monitor the entire operational processing. associated risks.
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133.177. Consequently, the institutions shall carefully analyse any proposed
change in the activities and ensure that they have the ability to bear the risks related thereto, the technical infrastructure and sufficient and competent human resources to control these activities and the associated risks related thereto.. The business unit which requestsrequesting the change in its activities isshall be in charge of issuing an analysis of the risks in this regard. Similarly, the risk control function shall carry out a prior, objective and comprehensive analysis of the risks associated with any proposed change in the activities. The risk analysis shall take into account the various scenarios and shall indicate, in particular, the institution’s ability of the institution to bear, manage and control the risks inherent in the planned activities. The compliance risk inherent in new products shall also be subject to prior analysis by the compliance function. With respect to their opinions, the internal control functions can rely on analyses carried out by the business units. 178.No new activity must be undertaken unless the authorised management approved it, all relevant parties have been heard, and the means mentioned in the preceding point are available.
134.179. The internal control functions may require that a change in activities
shall be deemed to be significantmaterial and thus be subject to the approval process. Sub-chapter 7.4. Outsourcing
135.180. Outsourcing shall mean the complete or partial transfer of the
operational functionstasks, activities or provisions of services of the institution to an external service provider, whether or not s/heit is part of the group to which the institution belongs. Whereas IT outsourcing, or a chain of outsourcing exclusively composed of IT outsourcing, relies on a cloud computing infrastructure as defined in Circular CSSF 17/654, the points of sub-chapter 7.4 of this circular shall not apply and the financial professional shall comply with the requirements of Circular CSSF 17/654. For the purposes of this sub-chapter, the term "“activity"” shall refer to the operational functionstasks, activities and provisions of services mentioned in the first paragraph. Any activity that, when it is not carried out in accordance with the rules, reduces the institution’sinstitution's ability to meet the regulatory requirements or to continue its operations as well as any activity necessary for the sound and prudent risk management shall be deemed to be "“material".”. 181.Where outsourcing or an outsourcing chain concerns purely services that are IT in nature and where at least one outsourcing meets the definition of cloud computing under Circular CSSF 17/654, the requirements of this sub-chapter shall not apply and the institution shall comply with the requirements of Circular CSSF 17/654.
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The exception laid down in the preceding paragraph shall not apply to business process outsourcing relying on an outsourced cloud computing infrastructure.
Section 7.4.1. General outsourcing requirements
136.182. Outsourcing shouldmust not result in non-compliance with the rules of
this Circular on central administration (Chapters 1 and 3). .
The outsourcing institution shall, in particular, comply with the following requirements:
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141.187. The outsourcing policy should considershall take into account the
impact of the outsourcing on the institution’s businessactivities and the risks it faces., in particular, the operational risks arising therefrom, such as legal risk, IT risk, reputational risk or concentration risk (at the level of service providers). It shall include reportinglay down the applicable requirements regarding outsourcing to which the service providers andare subject, from the preparation phase to the expiry or termination and through the reporting, and determine the control mechanism which the institution implements in this respect are subject from inception to the end of the outsourcing agreement. Outsourcing may, in no circumstances, lead to the circumvention of any regulatory restrictions or prudential measures of the CSSFcompetent authority or the challenge the CSSF’sof its supervision.
142.188. Special attention shouldmust be paid to the continuity aspects and the
revocable nature of outsourcing. The institution shallmust be able to continue its critical functions in case of exceptional events or crisis. In this respect, the outsourcing agreements shall provide for a notice of termination which shall give sufficient time to the institution to take the necessary measures to ensure continuity of the outsourced services and shall not include any termination clausesclause or service termination clausesclause because of resolution actions or reorganisation measures or a winding-up procedure applied to the institution, as provided forlaid down in the Law of 18 December 2015 on the failure of credit institutions and certain investment firms. The institution shall also take the necessary measures to be in a position to adequately transfer the outsourced activitiesservices to a different provider or to perform those activities itselfbring them in-house whenever the continuity or quality of the service provision areis likely to be affected.
143.189. For each outsourced activity, the institution shall designate, from
among its employeesstaff, a person who will be in charge of managing the outsourcing relationship and managing access to confidential data.
Section 7.4.2. Specific IT outsourcing requirements
144.190. The institution shall implement an IT policy which covers all IT
activities scattereddistributed among the institution and all the actors in the outsourcing chain. The IT organisation shall be adapted in order to integrate the outsourced activities to the proper functioning of the institution and the procedureprocedures manual shall be adapted accordingly. The institution’s continuity plan shall be established in accordance with the continuity plan of its subcontractor(s). The institution shall also provide for the regular testing of backups and of the facilities to restore backups.
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145.191. The IT systeminstitution’s policy on information systems security
policy of the institution shouldshall consider the personalindividual security establishedimplemented by its subcontractor(s)), in order to ensure the overall consistency.
146.192. IT outsourcing may cover consulting, development and maintenance
services (Sub-section 7.4.2.2), hosting services (Sub-section 7.4.2.3) or IT system management/operation services (Sub-section 7.4.2.1). Sub-section 7.4.2.1. IT system management/operation services
147.193. The institutions may contractually use services for the
management/operation of their systems:
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149.195. Third-party subcontractors other than support PFS which provide
consulting, development or maintenance services shallmust operate by default outside the IT production system. Formal agreement of the institution is required for each intervention on the production system. If an exceptional situation requires an intervention on the production system and if the access to confidential data cannot be avoided, the institution shallmust ensure that the third party in question is supervised throughout its mission by a person of the institution in charge of IT. Formal agreement of the institution is required for each intervention on the production system, except interventions carried out by a support PFS as
part of its mandate. and that the provisions of Article 41(2a) of the LFS are
complied with.
150.196. Any change in the application functionality by a third party - other than
the changes relating to corrective maintenance - shallmust be submitted for approval to the institution prior to its implementation.
151.197. The institution shall ensure that there are, if needed, no legal obstacles
to obtain access to the operating systems which have been developed by this third-party subcontractor. This can be achieved, for example, when the institution is the legal owner of the programmes. The institution shall ensure that it is possible to continue operating the applications which are critical for the activity in case the subcontractor defaultsevent of a subcontractor’s failure, for a period compatible with a transfer of this outsourcing to another subcontractor or a taking overtakeover of the applications concerned by the institution itself. Sub-section 7.4.2.3. Hosting services and infrastructure ownership
152.198. The IT infrastructure may be owned by the institution or be provided
by the subcontractor.
Where the IT infrastructure includes readable confidential data, only the staff of customers, the institution shall ensure compliance with the support PFS orprovisions of the Luxembourg credit institution can work either in their premises or those of the financial professional without any specific supervision by the staff of the institution, provided that the service is provided under Article 41(52a) of the LFS and is the subject of a service contract enabling this autonomy. Where the subcontractor is not a support PFS or a Luxembourg credit institution, the institution shall assess, in view of possible legal risks and legal obligations, whether or not the third parties concerned by this outsourcing, and in particular financial sector customers, should be informed, or their consent be obtained.. Otherwise, the subcontractor cannot interveneoperate on the premises infrastructure of the institution without being accompanied, throughout its mission, by a person of the institution in charge of IT.
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Where the IT infrastructure does not include confidential data, express approvalFormal agreement of the institution is required for each intervention on the IT infrastructure by a third party, except for interventions carried out by a support PFS as part of its mandate as operator.
153.199. It is not mandatory for the processing centre to be physically located
in the premises of the entity which is contractually responsible for the management of the IT systems. Whether the processing centre is in Luxembourg or abroad, it is thus possible that the hosting of the site is entrusted with another provider than that which providesthe one providing IT system management services. In this case, the institution shallmust ensure that the principles containedset out in this sub-chapter are complied with by the entity which is contractually responsible for the management of IT systems and that the suboutsourcing process is under control.
154.200. Where the processing centre is in Luxembourg, it may be hosted at a
provider other than a credit institution or a support PFS, provided that it does not act as operator. If the provider has no physical andor logical access to the institution’s systems, the institution shall ensure compliance with the provisions of Article 41(2a) of the LFS.
155.201. Where the processing centre is abroad, no confidential data which
enables the identification of a customer of the institution can be stored therein, unless it is protected. The confidentiality and integrity of data and systems shallmust be controlled throughout the IT outsourcing chain. In particular, access to data and systems shallmust fulfil the principles of “need to know” and “least privilege”, i.e. access isshall only be granted to persons whose functions so require, withfor a specific purpose, and their privileges shall be limited to the strict necessary minimum to exerciseperform their functions. The institution shall assess, in viewensure compliance with the provisions of possible legal risks and legal obligations, whether or not the third parties concerned by this outsourcing, and in particular financial sector customers, should be informed, or their consent be obtained. Article 41(2a) of the LFS.
Section 7.4.3. Additional general requirements
156.202. In order to enable the institution to assess the reliability and
comprehensivenesscompleteness of the data produced by the IT system as well as theirits compatibility with the accounting and internal control requirements, there should be one person, among its employees withstaff members, must have the requirednecessary IT knowledge to understand both the impact of the programmes on the accounting system and the actions takenperformed by the third party within the context of the provided services. The institution shallmust also have, in its premises, sufficient documentation on the programmes used.
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157.203. In case of IT service provision via telecommunication, the institution
shallmust ensure that:
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Chapter 8. Legal reporting
163.209. The credit institutions shall provide the CSSF competent authority with
the ICAAP report /ILAAP reports and compliancethe annual certificate issued by the authorised management in accordance of compliance with point 61the requirements of this Circular as well as the summary reports of the internal control functions in accordance with point 116 together with the draft annual accounts to be published ("VISA procedure"). Investment firms shall provide the CSSF with this information within the month of the general meeting having approved the annual accounts.the requirements of Circular CSSF 15/602. The relevant information are toshall be drafted in French, German or English.
Part III. Risk management
Chapter 1. General principles as regards risk measurement and
risk management
Sub-chapter 1.1. Institution-wide risk management framework
Section 1.1.1. General information
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Chapter 2. Concentration risk
6.11. Concentration risk results, in particular, from large (concentrated) exposures
to customers or, counterparties or service providers, respectively, or groups of customers or related, counterparties or related service providers, including related parties, onto countries or sectors (industries) as well as onto specific products or markets (intra-risk concentration). These exposures may be assets and liabilities items or off-balance sheet items, but concentration risk doesare not necessarily referlimited to balance sheet items or off-balance sheet items. Moreover, concentration risk may be the result of various risks (credit risk, market risk, liquidity risk, operational risk - in particular those related to outsourcing - or systemic risk) which combine (inter-risk concentration). Intra-risk or inter-risk concentrationconcentrations may result in economic and financial losses as well as in a significant and negative impact on the risk profile of the institution.
52. Points 211 to 215 shall apply, in particular, to concentration risk.
Concentration risk must be subject to particular vigilance and identification effort as it may jeopardise the financial stability of the institution.
12. For institutions operating on the domestic market, there is generally a
concentrated exposure to the Luxembourg real estate market. A significant market downturn would undermine the financial stability of these institutions and have an adverse impact on the image of the Luxembourg financial centre as a whole. Consequently, the institutions shall implement prudent policies as regards the granting of real estate mortgage credits pursuant to Sub-chapters 3.2 and 3.3.
Chapter 3. Credit risk
Sub-chapter 3.1. General principles21
13. Risk-taking within the meaning of this sub-chapter shall mean not only the
decisions on new credits to be granted, but also the decisions made in the context of the restructuring or renegotiation of exiting credits, particularly following a significant deterioration of the debtor’s creditworthiness. The restructuring and renegotiations (forbearance) shall comprise, in particular, granting extensions, deferrals, renewals or amendments of the credit terms, including the repayment plan and any forbearance measures within the meaning of Article 49b of the CRR and non-performing loans within the meaning of Article 47a(3) of the CRR. 21 Supplementing the provisions of Article 9 of RCSSF 15-02 regarding credit and counterparty risk.
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7.14. Each credit risk-taking shallmust be subject to a written analysis which
shouldshall cover at least the debtor’s creditworthiness, the repayment plan and the borrower’s repayment ability throughoutover the maturityperiod of the debt.borrowing. In particular, the credit decision cannot be based on an exclusive analysis of collateral or other credit risk mitigation techniques. The institutions shall take into account the overall debt level of the borrowerdebtor or the group of associated debtors, respectively. Regular repayments cannot exceed an amount which would not allow the borrower to have an adequate disposable income. There shallmust be a reasonable security margin in order to cover an increase in interest rates.
8.15. Each credit risk-taking shallmust be subject to a predetermined decisionmaking process which shouldshall also involve a body separate from the business
function.
For low credit risk-taking, the institutions may establishput in place a grantmaking process which should enableenables them to monitor this risk-taking, as a whole, without necessarily going through the decision-making processes and individual analyses as referred to in points 221 and 222here. The institutions areshall be in charge of internally defining the concept of "“low"” credit risk for the purposes of the firstpreceding paragraph. This definition is based, in particular, shall focus at least on the institution’s ability to manage, bear and control these risks.
53. The institutions shall have clear policies which define the measures to be taken
where a debtor does not comply with or indicates to the bank that s/he is no longer able to comply with the contractual provisions of his/her commitment, in particular the various payment deadlines.
54. Each decision to restructure the , on the one hand, and on the exposure amount
and credit shall be subject to the decision-making process laid down in points 221 to 223. The institutions shall maintain a list including all the restructured credits. The restructuring measures are those which are related to deterioration of the creditworthiness of the debtor. They shall include in particular the granting of extensions, postponements, renewals or changes in credit terms and conditions, including the repayment plan. The institutions shall have sound arrangements to identify and manage past due commitments. Past due commitments are commitments whose contractual maturity dates set for the payment of principal quality of the debtor and/or interests have expired transaction, on the other hand. The institutions shall have sound arrangements for the identification, management and provisioning of "doubtful" commitments. These refer to all commitments "in default" within the meaning of Part VII, Sub-section 3.4.2.2, of Circulars CSSF 06/273 and CSSF 07/290 which define the default in terms of significant delays in payment (exceeding 90 days) or indication of unlikeliness to pay.
55. The institutions shall maintain a list of the doubtful commitments on the debtor
or group of related debtors. These commitments shall be subject to periodic and
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For institutions operating on the domestic market, there is generally a concentrated exposure on the Luxembourg real estate market. A significant market downturn, which is very difficult to predict, would be likely to jeopardise the financial stability of these institutions and to have an adverse impact on the image of the Luxembourg financial centre as a whole. Consequently, institutions shall implement prudent policies as regards the granting of mortgages pursuant to Sub-chapter 3.1 and point 228. Moreover, institutions shall have sufficient capital in order to face adverse developments in the residential real estate market. The requirements prescribed in point 229 aim to strengthen the financial stability of these institutions through duly risk-adjusted regulatory capital requirements. These requirements strengthen the current rules included in Circular CSSF 06/273 according to the lessons learnt from the recent financial crisis episodes. Thus, in accordance with the first indent of point 229, institutions using the standardised approach for credit risk can, from now on, only apply the preferential risk weight of 35% to the parts of their mortgages whose loan-tovalue ratio (LTV) is below 80% (mortgages "whose value of the property is at least 25% higher than that of the exposure"). Consequently, a mortgage which fulfils all qualifying criteria of Section 2.2.7.1 of Part VII of Circular CSSF 06/273 (weighted retail exposure of 75%) and the criteria of Section 2.2.8.1 of Part VII of this circular (preferential risk weight of 35%) except for the new criteria 41, point d) which limits the LTV to 80% shall be, from now on, weighted for the purposes of determining the regulatory capital requirements at (0.8/LTV)*35%+((LTV-0.8)/LTV)*75% instead of 35%. The part of the mortgage exceeding 80% of the value of the real estate object is to be weighted according to the underlying exposure class. In this particular instance, the exposure shall comply with all criteria for retail exposures and the risk weight shall consequently be 75%. For the purpose of determining the LVT, the institutions may take into account all risk mitigation factors - direct personal contribution from the borrower or even the intervention of third parties by way of contributions, security interests or guarantees or collateral under the conditions provided for in Part IX of Circular CSSF 06/273 ("recognition of credit risk mitigation techniques"). For institutions using the internal ratings-based approach and in accordance with the second indent of point 229, the absolute floor for the loss ratio in the event of default shall remain at 10% after 31 December 2012.
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These institutions shall also ensure that their regulatory capital adequacy is subject to a stress test which shall at least fall within the parameters referred to in the third indent of point 229.
9.16. The institutions shall apply a prudent credit granting policy which aims to
safeguard their financial stability regardless of the observed or expected developments in the residential real estate market. This policy shall focus on a healthy ratiovalues of debt ratios and ratios between debt burden and income for the whole credit duration, as well as between the amount of the credit granted and the value of the securities heldobtained guarantees (loan-to-value), including the underlying mortgage on the property, based on prudent assessment methods.
56. Part VII of Circular CSSF 06/273 shall be amended as follows:
Under point 41, point d), the phrase ", by a substantial margin," shall be replaced by "by at least 25%"; Under point 176, the beginning of the sentence "Until 31 December 2012," shall be deleted. In the title of paragraph 3.2.4.2.3., the word "transitional" shall be deleted; Under point 257, the third sentence "The test to be employed shall be meaningful and reasonably conservative, considering at least the effect of mild economic recession scenarios" shall be replaced by "The test to be employed shall be relevant and reflect the consequences of a severe but plausible economic recession scenario". Finally, a second paragraph with the following content shall be added at the end of point 257: "For the purposes of the first paragraph, the stress test on the retail exposures secured by residential property requires an increase of minimum 50% of the PDs and a LGD of at least 20%". Sub-chapter 3.3. CreditCredits to real estate developers
10.17. Each real estate development project funding shallfinancing must provide for
a start date of the principal repayment when the credit is granted. This date cannot exceed a reasonable time limit as regards the beginning of the project fundingfinancing. When this time limit is exceeded, the file shall be automatically classified under the list of restructured credits (cf. point 225)credits “in default” within the meaning of Article 178 of the CRR, Article 14 of CSSF Regulation 18- 03 and the EBA/GL/2016/07 and the full provisioning of unpaid interests shall be fully paidinterest. The real estate development funding shallfinancing must not only be based on the developer's reputation. It shallIn particular, it must take into consideration all the other factors which enable the assessment of the developer’s strength, the legal structuring and the financial strength of the project, the environment in which the projects are carried out, their development phases and all the related guarantees and insurance.
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Moreover, the financing must be covered, in addition to the mortgage on the financed object, by a personal guarantee of the developer unless other guarantees or securities significantly cover the total cost of the financed object. The institutions shall set an internal limit for aggregate exposure they incur on the real estate development sector. Without prejudice to the rules applicable regarding large exposureexposures (Part XVIFour of Circular CSSF 06/273), the CRR), the completion bank guarantees may be excluded from this aggregate limit as far as the completion costs are adequately covered by pre-sale or pre-lease rates. This limit shallmust be in healthy proportion to their regulatory capital. It should be borne in mind that speculative immovable property financing as defined in Article 4(1)(79) of the CRR are deemed exposures associated with particularly high risk. In this respect, they shall be assigned a risk weight of 150%, as defined in Article 128(2)(d) of the CRR, under the standardised approach for credit risk. Sub-chapter 3.4. Exposures associated with particularly high risk
18. The institutions applying a standardised approach for credit risk shall put in place
a process to identify exposures associated with particularly high risk. This process shall cover at least the exposures within the meaning of Article 128(2) and (3) of the CRR.
19. The institutions shall apply Guidelines EBA/GL/2019/01 which specify the terms
“investment in venture capital firms” and “investment in private equity” as defined in Article 128(2)(a) and (c) of the CRR. These Guidelines also specify which types of exposures, other than those mentioned in Article 128(2) of the CRR, must be associated with particularly high risk and under which circumstances. The types of exposures identified by the institutions as carrying a particularly high risk of loss, without however meeting the specific characteristics described in EBA/GL/2019/01, must be notified to the competent authority by using the corresponding form available on the CSSF website. Sub-chapter 3.5. Non-performing and forborne exposures
20. The institutions shall have sound arrangements for the identification and
management of commitments whose contractual maturity dates set for the payment of principal and/or interests have expired. To this end, the institutions shall have policies in place which define the measures to be taken where a debtor does not comply with or indicates to the bank that s/he is no longer able to comply with the contractual provisions of his/her commitment, in particular the various payment deadlines.
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In addition, the institutions shall have sound arrangements for the identification, management and provisioning of commitments “in default” within the meaning of
Article 178 of the CRR, Article 14 of CSSF Regulation No 18-03 and
EBA/GL/2016/07.
21. The institutions must maintain a list of commitments on a debtor or group of
related debtors, whether they are forborne within the meaning of Article 49b of the CRR, non-performing within the meaning of Article 47a(3) of the CRR or “in default”. These commitments shall be subject to periodic and objective review which must enable the institution to acknowledge and carry out the impairment and provisions of assets as required.
22. The institutions must have appropriate practices regarding governance and risk
management of their non-performing exposures22, their forborne exposures23 and foreclosed assets in order to efficiently and sustainably reduce non-performing exposures in their balance sheets in accordance with the requirements of Circular CSSF 20/751.
Chapter 4. Risk transfer pricing
11.23. The institutioninstitutions shall implement a pricing mechanism for all risks
incurred. This mechanism, which is part of the internal governance arrangements, serves as an incentive to effectively allocate the financial resources in accordance with the risk toleranceappetite and the principle of sound and prudent business management.
12.24. The pricing mechanism shall be approved by the authorised management and
supervisedmonitored by the risk control function. The transfer prices shallmust be transparent and communicated to the relevant employees.staff members. The comparability and consistency of the internal transfer pricepricing systems used within the group shallmust be ensured.
13.25. The institution shall establish a complete and effective internal transfer
pricepricing system for liquidity. This system shall include all liquidity costs, benefits and risks. 22 Exposures classified as non-performing in accordance with Annex V of Commission Implementing Regulation (EU) No 680/2014. 23 Exposures for which forbearance measures were applied in accordance with Annex V of Commission Implementing Regulation (EU) No 680/2014.
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Chapter 5. Private wealth management (“private banking”)
26. Private banking activity is especially exposed to money laundering and terrorist
financing risks. Consequently, the institutions shall pay particular attention to comply with the anti-money laundering and counter terrorist financing obligations, whether they are regulatory, deriving from internal policies and procedures or falling within the good practices and organisation recommendations recognised as authority in this field.
14.27. The institutions shall have sound arrangementsprocesses to ensure that the
business relationships with their customers comply with the contracts entered intoagreements concluded with these customers. This objective may be best achieved when the discretionary management, advice management and simple execution of activities are separated from an organisational point of view.
15.28. The institutions shall have sound arrangements to ensure compliance with the
customers’customers' risk profiles, for the purposepurposes, in particular, of fulfilling the requirements arising from the MiFID regulations.
16.29. The institutions shall have sound arrangements in place to ensure the
communication of accurate information to the customers on the state of their assets. The issue and distribution of account statements and any other information on the state of assets shallmust be separated from the business function.
17.30. TransfersThe physical inflows and withdrawalsoutflows of cash, securities or
other valuables (for instance cash and bearer instruments) shallmust be carried out and controlledoverseen by a function separated from the business function.
18.31. Any entry and amendment of customers' identification data shallmust be
carried out and controlledoverseen by an a function that is independent function from the business function.
19.32. If a customer purchases an exchange-traded a derivative traded on an
organised market, the institution shall forthwith pass on (at least) the margin calls to be provided by the institution to the customer.
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20.33. The institutions shallmust have sound arrangements in respect of credit control
and bank overdraft within the context of the private banking activities. The financial guarantees covering these credits shallmust be sufficiently diversified and liquid. For the purposepurposes of having an adequate security margin, prudent discounts shallmust be applied according to the nature of the financial collateralguarantees. The institutions shallmust have an early warning system independent from the business function which should organiseorganises the monitoring of the financial collateral’sguarantees’ value and triggertriggers the liquidation process of the financial guarantees. It shallmust ensure that the liquidation process is triggered in good time, and in any case before the value of the collateralguarantees becomes lower than the credit. Contracts with customers shallmust clearly describe the procedure triggered in the event of inadequacy of the guarantees.
Chapter 6. Exposures to shadow banking entities
57. This Chapter shall only apply to institutions to which Part Four (Large exposures)
of Regulation (EU) No 575/2013 applies, in accordance with the level of application set out in Part One, Title II of said regulation. Sub-chapter 6.1. Implementation of sound internal control principles
21.34. The institutions shall put in place an internal framework for the identification,
management, controlmonitoring and mitigation of the risks arising from the exposures to shadow banking entities24 in accordance with EBA/GL/2015/20.
22.35. The institutions shall apply a materiality threshold to identify the exposures to
shadow banking entities. In accordance with EBA/GL/2015/20, any individual exposure to a shadow banking entity that is equal to or in excess of 0.25%25 of the institution’s eligible capital26, after taking into account the effect of the credit risk mitigation and exemptions27, shallmust be taken into consideration and cannot be deemed as low exposure. 24 Shadow banking entities are defined in paragraph 11 “Definitions” of EBA/GL/2015/20. These entities are undertakings that carry out one or more credit intermediation activities and that are not excluded undertakings within the meaning of said paragraph. “Credit intermediation activities” shall mean: “bank-like activities involving maturity transformation, liquidity transformation, leverage, credit risk transfer or similar activities”. 25 According to the definition “Exposures to shadow banking entities” of paragraph 11 of EBA/GL/2015/20. 26 Within the meaning of point (71) of Article 4(1) of Regulation (EU) No 575/2013the CRR. 27 i) Credit risk mitigating effects in accordance with Articles 399 and 403 of Regulation (EU) No 575/2013the CRR; ii) Exemptions provided for in Articles 400 and 493(3) of Regulation (EU) No 575/2013the CRR.
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23.36. The institutions shall ensure that any possible risks for the institution as a
result of their various exposures to shadow banking entities are adequately taken into account within the institution’s Internal Capital Adequacy Assessment (ICAAP) and capital planning. Sub-chapter 6.2. Application of quantitative limits
24.37. The institutions shall limit their exposures to shadow banking entities in
accordance with one of the two approaches (principal approach or fallback approach) as defined in Guidelines EBA/GL/2015/20.
25.38. In accordance with the principal approach, the institutions shouldmust set an
aggregate limit to their exposures to shadow banking entities relative to their eligible capital.
26.39. When setting an aggregate limit to exposures to shadow banking entities, each
institution shouldmust take into account:
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33.46. The credit institutions shall include, in their business continuity plan, actions
to address the contingent encumbrance resulting from relevant stress events, which means plausible albeit unlikely shocks, including downgrades in the credit institution’s credit rating, devaluation of pledged assets and increases in margin requirements. Specification:
Risk encumbrance shall be monitored through additional tables aiming at reporting encumbered assets, which will supplement Commission Implementing Regulation (EU) No 680/2014, in accordance with the CRR on prudential requirements for credit institutions. Draft provisional templates were published by the European Banking Authority on 24 July 2014 (EBA/ITS/2013/04/rev1).
Chapter 8. Interest rate risk
Sub-chapter 8.1 Interest rate risk arising from non-trading book activities
34.47. CRR institutions28, When implementing Article 14 (Interest rate risk arising
from non-trading book activities) of CSSF Regulation N°RCSSF 15-02 relating to, the supervisory review and evaluation process that applies to CRR institutions, shall comply with the guidelines published by the European Banking Authority in this respect.29 Investment firms which are not CRR investment firms do not fall within this chapterEBA/GL/2018/02. These guidelines include high-level guidelines and detailed guidelines which target the following three areas: internalSub-chapter 8.2. Corrections to modified duration for debt instruments
59. The institutions applying the standardised approach for the calculation of their
capital allocated to the requirements associated with the general interest rate risk in the banking book (“IRRBB 1”), measurement of this risk (“IRRBB 2” and “IRRBB 3”) and internal governance arrangements with regardare required to apply modifications to the calculation of the duration to interest rate risk in the banking book (“IRRBB 4.1” and “IRRBB 4.2”).
Part IV.Entry into force, transitional measures and
repealing provisions
60. This circular is applicable as from 1 July 2013.
29 “Guidelines on the management of interest rate risk arising from non-trading activities” (EBA/GL/2015/08) available on the EBA’s website: https://www.eba.europa.eu/-/eba-updates-guidelines-on-interest-rate-riskarising-from-non-trading-activities.
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By way of derogation from the first paragraph, the following provisions are applicable as from 1 January 2014:
Section 4.1.2 (Composition and qualificationreflect prepayment risk for debt instruments. The institutions shall apply one of the board of directors); Section 4.1.4 relatingtwo methods for the correction to the specialised committees, with the exception of the audit committee; Point 32 (Prohibition to combine the mandates of chairman of the board of directors and authorised manager);
35.48. The need to lay down in writing the guidelinesmodified duration provided for
in indents 4 to 8 of point 17EBA/GL/2016/09.
Chapter 9. Risks associated with the custody of financial assets by
third parties
49. The institutions shall have a policy for the selection of sub-custodians which hold
their customers’ financial assets. This policy shall establish minimum quality criteria which a sub-custodian must meet.
50. The institutions shall carry out due diligence controls before concluding an
agreement with a sub-custodian and they shall exercise an ongoing supervision of the sub-custodian for the whole duration of the relationship in order to ensure that these quality criteria are met.
51. The institutions shall perform regular reconciliations between the assets recorded
in their accounts as belonging to the customers and those confirmed by their subcustodians.
Part IV. Chronology
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COMMISSION DE SURVEILLANCE DU SECTEUR FINANCIER
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Annex I - Extracts from Section 9.3 of EBA/GL/2017/12, independent members of a
CRD-institution’s management body in its supervisory function
91. Without prejudice to paragraph 92, in the following situations it is presumed that
a member of a CRD-institution’s management body in its supervisory function is regarded as not ‘being independent’:
a. the member has or has had a mandate as a member of the management body in its management function within an institution within the scope of prudential consolidation, unless he or she has not occupied such a position for the previous 5 years; b. the member is a controlling shareholder of the CRD-institution, being determined by reference to the cases mentioned in Article 22(1) of Directive 2013/34/EU, or represents the interest of a controlling shareholder, including where the owner is a Member State or other public body;
c. the member has a material financial or business relationship with the CRDinstitution;
d. the member is an employee of, or is otherwise associated with a controlling shareholder of the CRD-institution; e. the member is employed by any entity within the scope of consolidation, except when both of the following conditions are met:
i. the member does not belong to the institution’s highest hierarchical level, which
is directly accountable to the management body;
ii. the member has been elected to the supervisory function in the context of a
system of employees’ representation and national law provides for adequate protection against abusive dismissal and other forms of unfair treatment; f. the member has previously been employed in a position at the highest hierarchical level in the CRD-institution or another entity within its scope of prudential consolidation, being directly accountable only to the management body, and there has not been a period of at least 3 years, between ceasing such employment and serving on the management body; g. the member has been, within a period of 3 years, a principal of a material professional adviser, an external auditor or a material consultant to the CRDinstitution or another entity within the scope of prudential consolidation, or otherwise an employee materially associated with the service provided; h. the member is or has been, within the last year, a material supplier or material customer of the CRD-institution or another entity within the scope of prudential consolidation or had another material business relationship, or is a senior officer of or is otherwise associated directly or indirectly with a material supplier, customer or commercial entity that has a material business relationship;
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i. the member receives in addition to remuneration for his or her role and
remuneration for employment in line with point (e) significant fees or other benefits from the CRD-institution or another entity within its scope of prudential consolidation; j. the member served as member of the management body within the entity for 12 consecutive years or longer; k. the member is a close family member of a member of the management body in the management function of the CRD-institution or another entity in the scope of prudential consolidation or a person in a situation referred to under points (a) to (h).
92. The mere fact of meeting one or more situations under paragraph 91 is not
automatically qualifying a member as not being independent. Where a member falls under one or more of the situations set out in paragraph 91, the CRD-institution may demonstrate to the competent authority that the member should nevertheless be considered as ‘being independent’. To this end CRD-institutions should be able to justify to the competent authority the reasoning why the members’ ability to exercise objective and balanced judgement and to take decisions independently are not affected by the situation.
93. For the purposes of paragraph 92 CRD-institutions should consider that being a
shareholder of a CRD-institution, having private accounts or loans or using other services, other than in the cases explicitly listed within this section, should not lead to a situation where the member is considered to be non-independent if they stay within an appropriate de minimis threshold. Such relationships should be taken into account within the management of conflicts of interest in accordance with the EBA Guidelines on Internal Governance.
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Commission de Surveillance du Secteur Financier 283, route d’Arlon L-2991 Luxembourg (+352) 26 25 1 - 1 direction@cssf.lu www.cssf.lu
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Source: Commission de Surveillance du Secteur Financier — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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