Adrian Trif – Supervision Officer
Department IV – Integrated Supervision
Division IV/4 - Combat against Unauthorised Business
Financial Market Authority
European Commission
Technical Assistance Information Exchange Instrument
Workshop on Corporate Governance
Chisinau, 14-15 May 2012
Corporate Governance for Financial Institutions (EU and Austrian legislation)
Corporate Governance for Insurance Companies (EU and Austrian legislation)
Corporate Governance in Austria
Adrian Trif, FMA Chisinau, 15 May 2012 2
Agenda
1. General remarks
2. European financial markets regulation
3. Current developments (response to the financial crisis)
4. Sound corporate governance (credit institutions)
1. BCBS principles
2. EBA guidelines
3. CRD III
4. CRD IV
5. Overview Austrian supervisory system
6. CG developments for insurance companies – Solvency II
7. CG in Austria – overview legal framework
8. CG in Austria – corporate governance codex
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Corporate Governance for Financial Institutions
1. General remarks
principal (investor) agent (management)
corporate (business, company, corporation, enterprise)
governance (management, leadership, administration, control)
system/framework of rules/principles for the management/control of a company
“Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return
on their investment.” (Shleifer and Visny)
“Corporate governance is about promoting corporate fairness, transparency and accountability.” (J. Wolfenshohn)
origin: US/UK
basic idea: soft law, self-regulation, self-executing rules, comply or explain
compliance as part of corporate governance
(external) corporate governance: transparency, ratings, external audit, M & A
markets
OECD - Principles of Corporate Governance (2004)
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Corporate Governance for Financial Institutions
1. Cui bono?
macro level
stakeholders - (re)-establishing trust/confidence in the financial system
micro level
investor - enhancing return on investment
management – reducing/mitigating liability risks
company – reducing cost of capital
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Corporate Governance for Financial Institutions
1. General Remarks - Market Discipline
ability of third-party claimants (eg debt and equity holders, potential investors) to identify risks in
financial institutions and to act in a way that signals those risks (to other market participants) or
changes the behaviour of a financial institution
well-informed shareholders/stakeholders may put pressure on the financial institution’s
management
act in the shareholders’/stakeholders’ best interests
financial institutions encouraged to anticipate and adjust risk-taking policies, with a view to
maintain/reduce their cost of capital
market discipline as a form of self regulation
timely and useful information required for market discipline to work in practice
in principle disclosure is to be driven by the market (participants)
supervisors to facilitate/ensure that adequate disclosure is provided by financial institutions
supervisors see market discipline through risk disclosures and transparency of financial
institutions in general as a supplementary tool in the supervision process
market discipline reinforces prudential tools and supervisory efforts by rewarding banks that
manage risk effectively and penalizing those with a less stringent risk management behaviour
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Corporate Governance for Financial Institutions
1. General Remarks – Corporate Governance Players
Organisation for Economic Co-operation and Development (OECD), Financial Stability Board
(FSB), G 8, G 20
Basel Committee on Banking Supervision (BCBS), International Association of Insurance
Supervisors (IAIS), International Accounting Standards Board (IASB)
European Commission (EC), European Corporate Governance Forum (ECGF), European
Council, European Parliament
European System of Financial Supervision
European Banking Authority (EBA)
European Insurance and Occupational Pensions Authority (EIOPA)
European Securities and Markets Authority (ESMA)
Governments, Parliaments in Member States
Financial Markets Regulators in Member States
Austrian Working Group for Corporate Governance
Industry (credit institutions, insurance companies, listed companies, investment firms, etc)
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Corporate Governance for Financial Institutions
1. General Remarks – Corporate Governance Players
Useful link (ECGF)
http://ec.europa.eu/internal_market/company/ecgforum/index_en.htm
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Corporate Governance for Financial Institutions
1. International Supervisory Architecture
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
types of rules:
rules regarding the markets and certain market activities
- e.g. how to issue securities to the public, how to provide regular reports and
ad hoc releases to the public
rules regarding financial institutions
- e.g. “fit and proper test”, licensing requirements
rules regarding the activities of financial institutions
- e.g. collecting deposits, concluding insurance contracts, giving investment
advice
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
levels of regulation (as rules):
supranational level
e.g. EU regulations, EU directives, Basel recommendations
national level
e.g. acts/laws of parliament, regulations/ordinances by government
and/or ministry, laws/regulations/ordinances/recommendations by
national supervisor
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
EU level
Treaty on European Union (consolidated version OJ 30 March 2010, C
83/13) (TEU)
Treaty on the Functioning of the European Union (consolidated version OJ
30 March 2010, C 83/47) (TFEU)
regulations, directives
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
levels of regulation/supervision (as regulatory authorities):
supranational level
- European regulators:
– European Banking Authority (London) (EBA)
– European Insurance and Occupational Pensions Authority (Frankfurt) (EIOPA)
– European Securities and Markets Authority (Paris) (ESMA)
– European Systemic Risk Board (Frankfurt) (ESRB)
national level
- national supervisory authorities
– independent entity and/or the Ministry of Finance and/or the Central Bank
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
Lámfalussy process (four-level approach for European legislation in the field of financial services)
Level 1:
- high level objectives
- framework
- directive or regulation
Level 2:
- technical details
- set out by the European Commission
Level 3:
- common standard and guidelines
- to ensure uniform implementation
- CEBS (Committee of European Banking Supervisors), CEIOPS (Committee of European
Insurance and Occupational Pensions Supervisors, CESR (Committee of European Securities
Regulators)
Level 4:
- enforcement of the high-level objectives
- Member States’ reporting obligations
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
response to the financial crisis
de Larosière Report (Report of the High-Level Group on Financial
Supervision in the EU published on 25 February 2009): “There is a Single
Market, and financial institutions operate across borders, but supervision
remains mostly at national level, uneven and often uncoordinated.”
result: new European supervisory architecture (“institutionalisation” of
CEBS, EIOPA, CESR)
aiming at coherent cross-border supervision
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
Latest developments – new European supervisory architecture
European System of Financial Supervision – microprudential (Directive
2010/78/EU of 24 November 2010 – “Omnibus-I-Directive”)
ESMA (Regulation (EU) No 1095/2010)
EBA (Regulation (EU) No 1093/2010)
EIOPA (Regulation (EU) No 1094/2010)
European Systemic Risk Board – macroprudential (Regulation (EU) No
1092/2010)
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
New European Supervisory Architecture - since 1 January 2011
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Corporate Governance for Financial Institutions
2. European Financial Markets Regulation
Updated legislation process
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Corporate Governance for Financial Institutions
3. Are financial institutions different?
key role of financial intermediaries in every economy
basic principles
Banks must not go bankrupt.
(Insurance) companies shall (be able to) fulfil their obligations.
financial crisis
collapse of financial markets in autumn 2008
credit crunch
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Corporate Governance for Financial Institutions
3. Financial Crisis
de Larosière Report
multiple, often inter-related, factors at both macro- and micro-economic levels
in particular accumulation of excessive risk in the financial system
excessive accumulation of risk in part due to the weaknesses in corporate governance of
financial institutions, especially in banks
BCBS: "a number of corporate governance failures and lapses”
OECD
Corporate Governance Lessons from the Financial Crisis (11 February 2009)
Corporate Governance and the Financial Crisis: Key Findings and Main Messages (29
May 2009)
Corporate Governance and the Financial Crisis – Conclusions and Emerging Good
Practices to Enhance Implementation of the Principles (17 February 2010)
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Corporate Governance for Financial Institutions
3. European Commission’s work on corporate governance
strengthening corporate governance as priority for the EC, especially in the context of
its financial markets reform and crisis prevention program
Green Paper – Corporate governance in financial institutions and remuneration policies
(COM (2010) 284 final of 2 June 2010)
CRD III - remuneration policies (Directive 2010/76/EU of the European Parliament and of
the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as
regards capital requirements for the trading book and for re-securitisations, and the
supervisory review of remuneration policies)
CRD IV proposal (COM(2011) 453 final of 20 July 2011 - Proposal for a Directive of the
European Parliament and of the Council on the access to the activity of credit institutions
and the prudential supervision of credit institutions and investment firms and amending
Directive 2002/87/EC of the European Parliament and of the Council on the supplementary
supervision of credit institutions, insurance undertakings and investment firms in a financial
conglomerate)
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Corporate Governance for Financial Institutions
3. European Commission’s work on corporate governance
Green Paper on the EU corporate governance framework (general paper)
Online consultation on EU company law
Review of the Takeover Bids Directive
Transparency – Modification of the Transparency Directive
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Corporate Governance for Financial Institutions
4. Sound corporate governance (credit institutions)
BCBS Principals for Enhancing Corporate Governance (BCBS
October 2010)
EBA Guidelines on Internal Governance (27 September 2011)
CRD III – remuneration (24 November 2010)
CRD IV Proposal (20 July 2011)
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Corporate Governance for Financial Institutions
4.1 BCBS Principals for Enhancing Corporate Governance
Principle 1 - The board has overall responsibility for the bank, including approving and overseeing the
implementation of the bank’s strategic objectives, risk strategy, corporate governance and corporate
values. The board is also responsible for providing oversight of senior management.
Principle 2 - Board members should be and remain qualified, including through training, for their
positions. They should have a clear understanding of their role in corporate governance and be able
to exercise sound and objective judgment about the affairs of the bank.
Principle 3 - The board should define appropriate governance practices for its own work and have in
place the means to ensure that such practices are followed and periodically reviewed for ongoing
improvement.
Principle 4 - In a group structure, the board of the parent company has the overall responsibility for
adequate corporate governance across the group and ensuring that there are governance policies
and mechanisms appropriate to the structure, business and risks of the group and its entities.
Principle 5 - Under the direction of the board, senior management should ensure that the bank’s
activities are consistent with the business strategy, risk tolerance/appetite and policies approved by
the board.
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Corporate Governance for Financial Institutions
4.1 BCBS Principals for Enhancing Corporate Governance
Principle 6 - Banks should have an effective internal controls system and a risk management function
(including a chief risk officer or equivalent) with sufficient authority, stature, independence, resources
and access to the board.
Principle 7 - Risks should be identified and monitored on an ongoing firm-wide and individual entity
basis, and the sophistication of the bank’s risk management and internal control infrastructures
should keep pace with any changes to the bank’s risk profile (including its growth), and to the external
risk landscape.
Principle 8 - Effective risk management requires robust internal communication within the bank about
risk, both across the organisation and through reporting to the board and senior management.
Principle 9 - The board and senior management should effectively utilise the work conducted by
internal audit functions, external auditors and internal control functions.
Principle 10 - The board should actively oversee the compensation system’s design and operation,
and should monitor and review the compensation system to ensure that it operates as intended.
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Corporate Governance for Financial Institutions
4.1 BCBS Principals for Enhancing Corporate Governance
Principle 11 - An employee’s compensation should be effectively aligned with prudent risk
taking: compensation should be adjusted for all types of risk; compensation outcomes should
be symmetric with risk outcomes; compensation payout schedules should be sensitive to the
time horizon of risks; and the mix of cash, equity and other forms of compensation should be
consistent with risk alignment.
Principle 12 - The board and senior management should know and understand the bank’s
operational structure and the risks that it poses (ie “know-your-structure”).
Principle 13 - Where a bank operates through special-purpose or related structures or in
jurisdictions that impede transparency or do not meet international banking standards, its board
and senior management should understand the purpose, structure and unique risks of these
operations. They should also seek to mitigate the risks identified (ie “understand-your-
structure”).
Principle 14 - The governance of the bank should be adequately transparent to its shareholders,
depositors, other relevant stakeholders and market participants.
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Corporate Governance for Financial Institutions
4.1 BCBS Principals for Enhancing Corporate Governance – the Role of
Supervisors
1. Supervisors should provide guidance to banks on expectations for sound corporate governance.
2. Supervisors should regularly perform a comprehensive evaluation of a bank’s overall corporate
governance policies and practices and evaluate the bank’s implementation of the principles.
3. Supervisors should supplement their regular evaluation of a bank’s corporate governance policies
and practices by monitoring a combination of internal reports and prudential reports, including, as
appropriate, reports from third parties such as external auditors.
4. Supervisors should require effective and timely remedial action by a bank to address material
deficiencies in its corporate governance policies and practices, and should have the appropriate tools
for this.
5. Supervisors should cooperate with other relevant supervisors in other jurisdictions regarding the
supervision of corporate governance policies and practices. The tools for cooperation can include
memorandum of understanding, supervisory colleges and periodic meetings among supervisors.
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Corporate Governance for Financial Institutions
4.2 EBA Guidelines on Internal Governance
legal basis – Article 22 of Directive 2006/48/EC of the European Parliament and of
the Council of 14 June 2006 relating to the taking up and pursuit of the business of
credit institutions as amended by Directive 2010/76/EU (CRD III)
requires „that every credit institution has robust governance arrangements, which
include a clear organisational structure with well defined, transparent and consistent
lines of responsibility, effective processes to identify, manage, monitor and report the
risks it is or might be exposed to, adequate internal control mechanisms, including
sound administrative and accounting procedures, and remuneration policies and
practices that are consistent with and promote sound and effective risk
management.‟
Article 73(3) of Directive 2006/48/EC requires that Article 22 also applies to parent
undertakings and subsidiaries on a consolidated or sub-consolidated basis.
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Corporate Governance for Financial Institutions
4.2 EBA Guidelines on Internal Governance
first chapter on „Corporate Structure and Organisation‟
concept of checks and balances in group structures
„Know-your-structure‟ principle in order to remedy weaknesses of complex structures
which have not been understood and counterbalanced sufficiently
limit opaque activities using non supervised structures
second chapter on „Management Body‟
guidelines on the composition, appointment, succession and qualifications of the
management body
focus more on the use of committees and the identification and management of conflicts of
interest
lack of oversight - one of the most significant weaknesses identified in the financial crisis
ensure that members of the management body (especially in its supervisory function)
devote sufficient time to their functions
responsibilities of the management body regarding outsourcing and setting the
remuneration policy
references to still applicable separate CEBS guidelines
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Corporate Governance for Financial Institutions
4.2 EBA Guidelines on Internal Governance
third chapter on „Risk Management‟
Inclusion of large parts of the High Level Principles on Risk Management
- high level principles on „governance and risk culture‟
- „risk models and integration of risk management areas‟
- „new product approval policy and process‟
- parts of the former high level principles on „risk appetite and risk tolerance‟ assigned to the new
guidelines on the risk management framework
fourth chapter on „Internal Control‟
role of Chief Risk Officer
risk management function
ensuring the proper staffing of the control function
one weakness was that the control functions were not given sufficient resources to fulfil
their duties
issue of unapproved exposures
implementing adequate processes for monitoring the set limits and taking appropriate
actions where necessary
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Corporate Governance for Financial Institutions
4.2 EBA Guidelines on Internal Governance
fifth chapter on „Systems and Continuity‟
new guidelines on information and communication systems and business continuity
management
Reference to generally accepted standards as regards IT systems
business continuity consistent with the BCBS „High Level Principles for Business
Continuity‟
sixth chapter on „Transparency‟
“Public Disclosure and Transparency‟ from the former CEBS Internal Governance
Guidelines
only limited amendments as the CEBS survey did not identify major weaknesses in this
area
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Corporate Governance for Financial Institutions
4.3 CRD III – remuneration policies
major legal consequence of the financial crisis
wrong/inappropriate financial incentives for board members/senior
management/certain employees as reason for (huge) accumulation of risks
recommendations/self-regulation/market discipline did not work
need for legal framework - Directive 2010/76/EUmain purpose: establishment of risk-based remuneration policies and practices, aligned
with the long-term interests of the bank in order to avoid excessive risk-taking
CEBS Guidelines on Remuneration Policies and Practices (10 December
2010)
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Corporate Governance for Financial Institutions
4.4 EC CRD IV Proposal
Overarching goals
ensure that the effectiveness of risk governance in European credit institutions
and investment firms is strengthened
help avoid excessive risk-taking by individual credit institutions and ultimately the
accumulation of excessive risk in the financial system
Operational objectives
increasing the effectiveness of risk oversight by Boards
improving the status of the risk management function
ensuring effective monitoring by supervisors of risk governance
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Corporate Governance for Financial Institutions
4.4 EC CRD IV Proposal
Recital 43: “Weaknesses in corporate governance in a number of institutions have contributed to
excessive and imprudent risk-taking in the banking sector which led to the failure of individual
institutions and systemic problems in Member States and globally. The very general provisions on
governance of institutions and the non-binding nature of a substantial part of the corporate
governance framework, based essentially on voluntary codes of conduct, did not facilitate the
effective implementation of sound corporate governance practices by institutions. The absence of
effective checks and balances within institutions resulted in a lack of effective oversight of
management decision-making, which exacerbated short-term and excessively risky management
strategies. The unclear role of the competent authorities in overseeing corporate governance systems
in institutions did not allow for sufficient supervision of the effectiveness of the internal governance
processes.”
Recital 44: “In order to address the potentially detrimental effect of poorly designed corporate
governance arrangements on the sound management of risk, Member States should introduce
principles and standards to ensure effective oversight by the management body, promote a sound
risk culture at all levels of credit institutions and investment firms and enable competent authorities to
monitor the adequacy of internal governance arrangements. These principles and standards should
apply taking into account the nature, scale and complexity of institutions' activities.”
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Corporate Governance for Financial Institutions
4.4 EC CRD IV Proposal
Article 73 – Procedures and internal control mechanisms (same wording as Article 22
of Directive 2006/48/EC)
What’s new?
delegation of legislative power to the EC
EBA to develop draft regulatory technical standards
more detailed rules in sub-section 3 (Governance)
- Article 86 – governance arrangements
- Article 87 – management body
- Article 88 – remuneration policies
- Article 89 – institutions that benefit from government intervention
- Article 90 – variable elements of remuneration
- Article 91 – remuneration committee
even more detailed rules to be implemented by technical standards
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Corporate Governance for Financial Institutions
5. Supervision of financial intermediaries in Austria
In Austria, the job of supervising the financial markets is carried out by three institutions. In
outline form, the tasks are as follows:The Federal Ministry of Finance (BMF) develops and defines the legislative framework, which is then adopted by the
Austrian parliament (legislative process).
The Oesterreichische Nationalbank (OeNB) monitors the stability of the financial market at a macro level. It is
responsible for the supervision of payment systems, and is also involved in the supervision of banks.
The Financial Market Authority (FMA) monitors and checks the individual financial institutions and participants in the
markets (micro level).
As an integrated supervisory institution, the FMA, which was founded in 2002, brings together
responsibility for supervising all significant providers and functions under one roof. The authority
supervises banks, insurance undertakings, pension fund companies, corporate provision funds,
investment firms and investment service providers, investment funds, financial conglomerates
and exchange operating companies.
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Corporate Governance for Financial Institutions
5. Supervision of financial intermediaries in Austria
FMA organisation chart
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Corporate Governance for Financial Institutions
5. Supervision of financial intermediaries in Austria
Banking supervision
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Corporate Governance for Financial Institutions
5. Levels of supervision/responsibility (Austrian bank)
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Corporate Governance for Insurance Companies
6. Solvency II - Reasons
various analyses
Müller Report (1997)
KPMG Study (2002)
Sharma Report (2002) – Conference of the Insurance Supervisory Services of
the Member States of the European Union
reasons for most (financial) difficulties of insurance companies
not insufficient own funds, but
management mistakes and insufficient/bad risk management
Paul Sharma (former FSA): “We concluded that supervision will be most
effective where we have the tools to tackle the full causal chain.”
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Corporate Governance for Insurance Companies
6. Risk Map – Sharma Report 2002
r
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Corporate Governance for Insurance Companies
6. Solvency II
Directive 2009/138/EC of the European Parliament and of the Council of 25
November 2009 on the taking-up and pursuit of the business of Insurance and
Reinsurance (Solvency II)
Recital 29: “Some risks may only be properly addressed through governance
requirements rather than through the quantitative requirements reflected in the
Solvency Capital Requirement. An effective system of governance is therefore
essential for the adequate management of the insurance undertaking and for the
regulatory system.”
Recital 30: “The system of governance includes the risk-management function, the
compliance function, the internal audit function and the actuarial function.”
Recital 33: “The functions included in the system of governance are considered to be
key functions and consequently also important and critical functions.”
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Corporate Governance for Insurance Companies
6. Solvency II
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Corporate Governance for Insurance Companies
6. Solvency II
Section 2 - System of governance
Article 41 - General governance requirements
Article 42 - Fit and proper requirements for persons who effectively run the
undertaking or have other key functions
Article 43 - Proof of good repute
Article 44 - Risk management
Article 45 - Own risk and solvency assessment
Article 46 - Internal control
Article 47 – Internal audit
Article 48 - Actuarial function
Article 49 - Outsourcing
Article 50 - Implementing measures
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Corporate Governance for Insurance Companies
6. Solvency II
Article 41 (General governance requirements):
„1. Member States shall require all insurance and reinsurance undertakings to have in place an
effective system of governance which provides for sound and prudent management of the
business. That system shall at least include an adequate transparent organisational structure
with a clear allocation and appropriate segregation of responsibilities and an effective system
for ensuring the transmission of information. It shall include compliance with the requirements
laid down in Articles 42 to 49. The system of governance shall be subject to regular internal
review.
2. The system of governance shall be proportionate to the nature, scale and complexity of the
operations of the insurance or reinsurance undertaking.
3. Insurance and reinsurance undertakings shall have written policies in relation to at least risk
management, internal control, internal audit and, where relevant, outsourcing. They shall
ensure that those policies are implemented. Those written policies shall be reviewed at least
annually. They shall be subject to prior approval by the administrative, management or
supervisory body and be adapted in view of any significant change in the system or area
concerned.
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Corporate Governance for Insurance Companies
6. Solvency II
Article 41 (General governance requirements) continued:
4. Insurance and reinsurance undertakings shall take reasonable steps to ensure continuity and
regularity in the performance of their activities, including the development of contingency plans.
To that end, the undertaking shall employ appropriate and proportionate systems, resources
and procedures.
5. The supervisory authorities shall have appropriate means, methods and powers for verifying the
system of governance of the insurance and reinsurance undertakings and for evaluating
emerging risks identified by those undertakings which may affect their financial soundness.
The Member States shall ensure that the supervisory authorities have the powers necessary to
require that the system of governance be improved and strengthened to ensure compliance
with the requirements set out in Articles 42 to 49.”
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Corporate Governance for Insurance Companies
6. Solvency II
Article 44 (Risk management)
„1. Insurance and reinsurance undertakings shall have in place an effective risk-management
system comprising strategies, processes and reporting procedures necessary to identify,
measure, monitor, manage and report, on a continuous basis the risks, at an individual and at
an aggregated level, to which they are or could be exposed, and their interdependencies. That
risk-management system shall be effective and well integrated into the organisational structure
and in the decision-making processes of the insurance or reinsurance undertaking with proper
consideration of the persons who effectively run the undertaking or have other key functions.
2. The risk-management system shall cover the risks to be included in the calculation of the
Solvency Capital Requirement as set out in Article 101(4) as well as the risks which are not or
not fully included in the calculation thereof.
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Corporate Governance for Insurance Companies
6. Solvency II
Article 44 (Risk management) – continued:
The risk-management system shall cover at least the following areas:
(a) underwriting and reserving;
(b) asset–liability management;
(c) investment, in particular derivatives and similar commitments;
(d) liquidity and concentration risk management;
(e) operational risk management;
(f) reinsurance and other risk-mitigation techniques.
…”
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Corporate Governance for Insurance Companies
6. Solvency II
Article 45 (Own risk and solvency assessment):
“1. As part of its risk-management system every insurance undertaking and reinsurance undertaking
shall conduct its own risk and solvency assessment.
That assessment shall include at least the following:
(a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance
limits and the business strategy of the undertaking;
(b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapter VI,
Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in
Chapter VI, Section 2;
(c) the significance with which the risk profile of the undertaking concerned deviates from the
assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3),
calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or
with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection 3.
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Corporate Governance for Insurance Companies
6. Solvency IIArticle 45 (Own risk and solvency assessment) - continued:
2. For the purposes of paragraph 1(a), the undertaking concerned shall have in place processes
which are proportionate to the nature, scale and complexity of the risks inherent in its business
and which enable it to properly identify and assess the risks it faces in the short and long term
and to which it is or could be exposed. The undertaking shall demonstrate the methods used in
that assessment.
3. In the case referred to in paragraph 1(c), when an internal model is used, the assessment shall
be performed together with the recalibration that transforms the internal risk numbers into the
Solvency Capital Requirement risk measure and calibration.
4. The own-risk and solvency assessment shall be an integral part of the business strategy and
shall be taken into account on an ongoing basis in the strategic decisions of the undertaking.
5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1
regularly and without any delay following any significant change in their risk profile.
6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results
of each own-risk and solvency assessment as part of the information reported under Article 35.
7. The own-risk and solvency assessment shall not serve to calculate a capital requirement. The
Solvency Capital Requirement shall be adjusted only in accordance with Articles 37, 231 to 233
and 238.”
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Corporate Governance for Insurance Companies
6. Solvency II
Article 46 (Internal control)
„1. Insurance and reinsurance undertakings shall have in place an effective internal control system.
That system shall at least include administrative and accounting procedures, an internal control
framework, appropriate reporting arrangements at all levels of the undertaking and a
compliance function.
2. The compliance function shall include advising the administrative, management or supervisory
body on compliance with the laws, regulations and administrative provisions adopted pursuant
to this Directive. It shall also include an assessment of the possible impact of any changes in
the legal environment on the operations of the undertaking concerned and the identification and
assessment of compliance risk.”
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Corporate Governance for Insurance Companies
6. Solvency II
Article 47 (Internal audit)
„1. Insurance and reinsurance undertakings shall provide for an effective internal audit function. The
internal audit function shall include an evaluation of the adequacy and effectiveness of the
internal control system and other elements of the system of governance.
2. The internal audit function shall be objective and independent from the operational functions.
3. Any findings and recommendations of the internal audit shall be reported to the administrative,
management or supervisory body which shall determine what actions are to be taken with
respect to each of the internal audit findings and recommendations and shall ensure that those
actions are carried out.”
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Corporate Governance for Insurance Companies
6. Solvency IIArticle 48 (Actuarial function)
„1. Insurance and reinsurance undertakings shall provide for an effective actuarial function to:
(a) coordinate the calculation of technical provisions;
(b) ensure the appropriateness of the methodologies and underlying models used as well as the
assumptions made in the calculation of technical provisions;
(c) assess the sufficiency and quality of the data used in the calculation of technical provisions;
(d) compare best estimates against experience;
(e) inform the administrative, management or supervisory body of the reliability and adequacy of the
calculation of technical provisions;
(f) oversee the calculation of technical provisions in the cases set out in Article 82;
(g) express an opinion on the overall underwriting policy;
(h) express an opinion on the adequacy of reinsurance arrangements; and
(i) contribute to the effective implementation of the risk-management system referred to in Article 44,
in particular with respect to the risk modelling underlying the calculation of the capital
requirements set out in Chapter VI, Sections 4 and 5, and to the assessment referred to in
Article 45.”
Adrian Trif, FMA Chisinau, 15 May 2012 56
Corporate Governance for Insurance Companies
6. Solvency IIArticle 48 (Actuarial function) – continued:
2. The actuarial function shall be carried out by persons who have knowledge of actuarial and
financial mathematics, commensurate with the nature, scale and complexity of the risks
inherent in the business of the insurance or reinsurance undertaking, and who are able to
demonstrate their relevant experience with applicable professional and other standards.”
Adrian Trif, FMA Chisinau, 15 May 2012 57
Corporate Governance for Insurance Companies
6. Solvency II – Major Challenges for Insurance Companies
inclusion of all relevant risks in the corporate management
ongoing monitoring/control of risks which are not (entirely) part of Solvency
Capital Requirement
European law compliant interpretation of indeterminate legal terms
individual implementation of abstract worded targets
difficult to exactly foresee regulatory interventions
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Corporate Governance for Insurance Companies
6. Solvency II – proportionality principle
Recital 19: “This Directive should not be too burdensome for small and medium-sized
insurance undertakings. One of the tools by which to achieve that objective is the
proper application of the proportionality principle. That principle should apply both to
the requirements imposed on the insurance and reinsurance undertakings and to the
exercise of supervisory powers.”
Article 29 para 3: „Member States shall ensure that the requirements laid down in this
Directive are applied in a manner which is proportionate to the nature, scale and
complexity of the risks inherent in the business of an insurance or reinsurance
undertaking.”
insurance companies to assess which obligations are proportionate with regard to
their risk structure
two sides of the proportionality principle: less requirements for insurance companies with a lower risk profile
stricter requirements for insurance companies with a higher risk profile
Adrian Trif, FMA Chisinau, 15 May 2012 59
Corporate Governance for Insurance Companies
6. Governance System
general governance requirements
internal control system compliance function
function internal audit
risk management function
fit & proper outsourcing
ORSAactuarial funktion
Corporate Governance for Insurance Companies
supervisory board
executive board
external auditor
shareholders‘ meetingresponsible actuary
Treuhänder
AML/CFT officer
compliance
regular controls by regular controls by executive boardexecutive board
6. Supervision/control system (Austrian insurance company)
general governance requirements
internal control system compliance function
function internal audit
risk management function
fit & proper outsourcing
ORSAactuarial funktion
Adrian Trif, FMA Chisinau, 15 May 2012 61
Corporate Governance for Insurance Companies
OECD Guidelines on Insurer Governance (2011)
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Corporate Governance in Austria
7. Legal Framework
specific corporate structure, internal organisation, duties and liabilities of the
management and supervisory boards and their directors, accounting, corporate
restructuring
Stock Corporation Act
Limited Liability Company Act
European Company Directive and European Company Act
Commercial Code
general provisions regarding liability
General Civil Code
specific provisions for listed companies, financial intermediaries
Stock Exchange Act, Takeover Act, Issuer Compliance Regulation, Capital Market Act,
Banking Act, Securities Supervision Act, Insurance Supervision Act, etc
Code of Corporate Governance
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Corporate Governance in Austria
Österreichischer Arbeitskreis für Corporate Governance
(Austrian Working Group for Corporate Governance)
http://www.corporate-governance.at/
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Corporate Governance in Austria
Adrian Trif, FMA Chisinau, 15 May 2012 65
Corporate Governance in Austria
8. Austrian Code of Corporate Governance (Code)
published in October 2002, latest amendment in January 2012 (subject to
annual review)
provides Austrian corporations with a framework for the management and
control of enterprises
covers the standard of good corporate management common in international
business practice as well as the most important provisions of Austrian corporate
law of relevance in this context
addressed primarily to Austrian exchange-listed companies including exchange-
listed European companies (Societas Europaea) registered in Austria
based on the provisions of Austrian corporation law, securities law and capital
markets law, the EU recommendations on the tasks of supervisory board
members and on the remuneration of directors as well as on the principles set
out in the OECD Principles of Corporate Governance
Adrian Trif, FMA Chisinau, 15 May 2012 66
Corporate Governance in Austria
8. Austrian Code of Corporate Governance
Legal requirement (L): This rule refers to mandatory legal
requirements.
Comply or explain (C): This rule is to be followed; any
deviation must be explained and the
reasons stated in order to be in
compliance with the Code.
Recommendation (R): The nature of this rule is a
recommendation; non-compliance
with this rule requires neither
disclosure nor explanation.
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Corporate Governance in Austria
9. Austrian Code of Corporate Governance
I. Preamble
II. Shareholders and the General Meeting
equal treatment
takeover bids
convening general meetings, publications in connection with general meetings
resolution for share buy back
III. Cooperation between the Supervisory Board and the Management Board
obligation to provide Supervisory Board with comprehensive information (regular and ad
hoc information)
cooperation as regards strategy, overall direction of the company
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Corporate Governance in Austria
9. Austrian Code of Corporate Governance
IV. Management Board
overall responsibility
fundamental decisions to be reached by whole Management Board
conflicts of interest and self-dealing
Compensation
V. Supervisory Board
responsible for oversight of Management Board
appoints members of Management Board
approval of certain business transactions
committees, mandatory audit committee
conflicts of interest and self-dealing
qualifications
compensation
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Corporate Governance in Austria
9. Austrian Code of Corporate Governance
VI. Transparency and Auditing
corporate governance report
financial reporting and disclosure
investor relations and the internet
Annex 1
Guidelines for Independence
Annex 2
mandatory information disclosures in the corporate governance report
information on the composition and working procedures of the management board and of
the supervisory board as well as of its committees
disclosure remuneration management board and supervisory board
report on external evaluation if available
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Corporate Governance in Austria
9. Austrian Code of Corporate Governance
Annex 3
recommendations addressed to foreign companies listed in Austria
- no subscription to own shares
- no repayment of paid-in amounts
- profit distribution to shareholders
- changes to the articles of association
- exclusion of subscription rights
- acquisition of own shares
Annex 4
brief overview of the Austrian Stock Corporation Act
the organisation of a stock corporation under Austrian law
shareholders and the general meeting, the supervisory board, the management board
capital increases, share buybacks
capital markets rules
groups and company transformations
Adrian Trif, FMA Chisinau, 15 May 2012 71
Many thanks for your attention!
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