Update of CSSF Circular 12/552: Key governance obligations clarified for the banking sector
- Articles and memoranda
- Posted 24.09.2024
On 29 August 2024, the Commission de Surveillance du Secteur Financier (the “CSSF”) issued Circular 24/860 ( “CSSF Circular 24/860”) clarifying certain key provisions of its CSSF Circular 12/552 on central administration, internal governance and risk management, as amended (“CSSF Circular 12/552”).
CSSF Circular 12/552 applies, inter alia, to Luxembourg credit institutions (including their branches), Luxembourg branches of credit institutions established in another Member State1 and Luxembourg branches of third-country credit institutions.
Key clarifications
- Revision of the definition of “significant institution”: the CSSF revised the definition of “significant institution”2 to clarify the powers of the competent authorities to determine whether credit institutions other than systematically important credit institutions should be considered as such for the purposes of CSSF Circular 12/552.
- Inclusion of a definition of “transactions with related parties”: the CSSF included a definition of “transactions with related parties”3 clarifying the scope of the transactions falling under the scope of Section 7.2.1. “Specific requirements relating to conflicts of interest involving related parties” of CSSF Circular 12/552.
- Proportionate approach for the application of CSSF Circular 12/552 to intermediate (mixed) financial holding companies: the CSSF reduced the scope of application of CSSF Circular 12/552 to intermediate (mixed) financial holding companies (“Intermediate (M)FHCs”) in order to promote proportionality. Intermediate (M)FHCs have to comply with the provisions of CSSF Circular 12/552 in a proportionate manner when they have no material impact on the conduct and compliance of both their consolidating parent institution and their subsidiaries. In such a scenario, the extent of this proportionate approach has to be determined by mutual agreement between the Intermediate (M)FHC and the competent authority.
- Obligation to establish an audit committee: the obligation to establish an audit committee set out in CSSF Circular 12/552 has been aligned with the provisions of the Law of 23 July 2016 concerning the audit profession, as amended (the “Audit Law”). Only institutions subject to Article 52 of the Audit Law and that do not benefit from the exemption provided for in Article 52(4) of the Audit Law must establish an audit committee.
- Veto right of the Chief Risk Officer (“CRO”): the CSSF aligned the scope of the CRO’s veto right and his/her ability to challenge decisions with the EBA/GL/2021/05 on internal governance. CSSF Circular 12/552 now provides that institutions may grant the CRO with a right to veto decisions made at levels below the management body, but no longer with a right to veto decisions made by the authorised management. With respect to the CRO’s ability to challenge decisions, the CRO should be able to challenge decisions by the institution’s management and its management body, and the grounds for objections should be formally documented.
Date of application
- CSSF Circular 12/552, updated by CSSF Circular 24/860, will enter into force on 30 September 2024.
What’s next for in-scope entities?
- Banks should review, and adapt as the case may be, their internal procedures and policies to make sure that their internal governance frameworks are in line with the newly clarified requirements of CSSF Circular 12/552.
- Intermediate (M)FHCs should analyse if they meet the relevant criteria to determine whether they could apply for an exemption from applying CSSF Circular 12/552.
| 1 | Luxembourg branches of credit institutions authorised in another Member State, in coordination with this institution, have to establish central administration, internal governance and risk management arrangements which are comparable to those provided in CSSF Circular 12/552 in respect of the areas for which the CSSF retains an oversight responsibility as host authority and as authority in charge of an area outside the banking prudential supervision (i.e. AML/CFT rules, rules applicable to the provision of investment services and requirements applicable to UCI depositaries). | |||
| 2 | “Significant institution” shall mean “systematically important credit institutions in accordance with Article 59-3 of the LFS. Where appropriate, the competent authority may determine whether other credit institutions should be considered as significant institutions for the purposes of this Circular based on the assessment of the institutions’ size and internal organisation as well as the nature, the scale and the complexity of their activities”. | |||
| 3 | “transactions with related parties” include all types of transactions. This includes both on-balance sheet and off-balance sheet credit exposures and claims, but also dealings such as service contracts, asset purchases and sales, construction contracts, lease agreements, derivative transactions, borrowings and write-offs. It encompasses transactions with parties that would become related parties as a result of the transaction, or where it is determined as the time of the transaction, that the contracting party will become a related party. | |||
