New Regulatory Guidelines On Corporate Governance For Banks, Securities Dealers And Financial Groups/ Conglomerates (FINMA Circular 2017/1)

Author:Mr Peter Hsu and Sandro Fehlmann
Profession:Bar & Karrer
 
FREE EXCERPT

Reference: CapLaw-2017-17

On 1 November 2016, FINMA published its new circular 2017/1 on "Corporate governance - banks" streamlining the regulatory framework on corporate governance for banks, securities dealers, financial groups and conglomerates by defining partially revised minimum requirements and underlying principles. The new circular consolidates and replaces three former FINMA circulars and addresses the experiences made in the financial crisis as well as the revised international standards. The most significant changes pertain to i) FINMA's commitment to a more principle based approach and consistent application of the principle of proportionality, ii) the introduction of provisions for the audit and risk committee of the governing body as well as iii) the possibility to delegate the internal audit function to another unregulated group company, provided such group company fulfils certain minimum requirements regarding capabilities and resources. The new circular will enter into force on 1 July 2017.

1) Introduction

On 1 November 2016, FINMA published its new Circular 2017/1 "Corporate governance - banks" (Circular 17/1) streamlining the regulatory framework on corporate governance for banks, securities dealers, financial groups and (bank or securities dealer dominated) conglomerates (collectively referred to as Banks) by i) consolidating the currently applicable guidelines outlined in various circulars and FAQs and ii) partially revising the minimum requirements as well as the underlying principles. Circular 17/1 will enter into force on 1 July 2017. Concurrently, FINMA also revised its circulars 2008/21 on "Operational risks - banks" and 2010/1 on "Remuneration schemes", which will both enter into force on 1 July 2017 as well (summary discussion on these to follow in a separate CapLaw publication).

Circular 17/1 remains to a large extent in line with the currently applicable FINMA guidance (and the draft circular published on 1 March 2016), except for a number of important changes in specific areas, which will be the focus of this article.

2) Circular 17/1 on Corporate Governance for Banks

  1. Overview

    Circular 17/1 consolidates the supervisory law requirements relating to corporate governance, internal control systems and risk management for Banks that were previously scattered between two FINMA circulars: i) circular 2008/24 "Supervision and internal control - banks" and ii) circular 2008/21 "Operational risks - banks" as well as the FAQ on the Governing Body (Oberleitungsorgan).

    Circular 17/1 will supersede circular 2008/24 and the FAQ which currently regulates corporate governance aspects for banks and securities dealers. Circular 2008/24 has not been materially amended since its implementation in 2006. Therefore, the circular does not yet reflect lessons learned from the financial crisis. Furthermore, international standard setters such as the Basel Committee on Banking Supervision (BCBS) adjusted their guidelines in the meantime to implement a standard for a modern corporate governance and efficient risk management (e.g. the BCBS Guidelines on Corporate governance principles for banks dated July 2015 available under http://www. bis.org/bcbs). In addition, the International Monetary Fund (IMF) issued in its Financial Sector Assessment Programm of 2014 recommendations on capitalization and corporate governance (see https://www.imf.org). In Circular 17/1, FINMA addresses these developments, completing it with additional risk management aspects demonstrating FINMA's increased focus on a modern corporate governance as well as an adequate and efficient internal control system. Apart from international developments, this strengthened focus on risk management results from FINMA's recent supervisory practice showing that operational risks in banking have become more diverse.

    At its core, Circular 17/1 includes provisions relating to various corporate governance aspects such as governing and management bodies, risk management, the internal control system and internal audit. The circular consistently reflects the concept of principle-based regulation. However, FINMA explicitly acknowledged that corporate governance...

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