SwissBanking
The online magazine of the Swiss Bankers Association
December 14, 2016

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New rules for corporate governance

New rules for corporate governance

What are the duties and responsibilities of a bank’s board of directors? How should the internal control system be organised? And what role does internal auditing play? The answers to these questions can be found in the new FINMA guidelines on corporate governance.

On 1 November 2016, the Swiss Financial Market Supervisory Authority (FINMA) published its revised circular on corporate governance for Banks. The new provisions will enter into force on 1 July 2017.

FINMA’s “Corporate governance” circular (FINMA-Circ. 2017/1) is a completely revised version of the circular "Supervision and internal control” that has been in place to date. The most recent revision was conducted in conjunction with partial revisions of the two circulars “Operational risks” and “Remuneration schemes”. It addresses important aspects of the organisational structure and processes of a bank.

Industry involvement

The Swiss Bankers Association (SBA) was closely involved in these revisions last year. In particular, in its position statement of 20 April 2016, the SBA strongly criticised the consultation drafts. The statement focussed on legal and regulatory concerns, and in particular criticised the elimination of the tried and tested “comply or explain” principle.

The “Corporate Governance” circular will enter into force on 1 July 2017, although a transition period is foreseen for a number of elements.

In parallel, various discussions were conducted with FINMA at different levels. Thanks to these efforts, substantial improvements were made vis-à-vis the drafts originally proposed by FINMA. Overall, the dialogue with FINMA was conducted in a very open and constructive manner.

On 1 November 2016, FINMA published the definitive versions of the revised circulars. The “Corporate Governance” circular will enter into force on 1 July 2017, although a transition period is foreseen for a number of elements. In its consultation report, FINMA explains how it reacted to the positions submitted by the sector.

Less micromanagement

Overall, the level of detail of the requirements to be met was significantly reduced in the final version. In its position statement, the SBA sharply criticised the excessive micromanagement that was foreseen in the consultation draft. The stronger principles-based approach in the definitive version is therefore greatly welcomed.

In terms of the committees of the board of directors as the supreme governing body, the circular provides that institutions in supervisory categories 1 to 3 must appoint an audit committee and a risk committee. For supervisory category 3, however, the formation of a combined committee is now permitted. FINMA also accepted the sector’s wish for the division of responsibilities between the board of directors and the executive board to be set out in greater detail, and for a clearer distinction between the different levels of management. The requirements for the so-called “Institution-wide risk management framework” have also been significantly tightened.

The SBA sharply criticised the excessive micromanagement that was foreseen in the consultation draft.

Institutes in supervisory categories 1 to 3 must have an independent risk control and compliance function. In accordance with the new circular, the chief risk officer (CRO) may, in addition to risk control, also be responsible for other independent control bodies. Further examples of welcome amendments vis-à-vis the original drafts are the relaxation of the requirements for the composition of boards of directors (diversity), the reduction of the granularity of information to be disclosed, and the amendment of the timing of entry into force.

A modern benchmark

With the revision that has been outlined, FINMA aims on the one hand to take into account international developments, for example in the context of the Basel Committee on Banking Supervision. On the other hand, it aims to incorporate lessons learned from the financial crisis. Although the elimination of the “comply or explain” principle is regrettable, in overall terms, the Swiss financial centre will now have modern and seminal new rules for corporate governance.