English
SpanishSound and effective corporate governance arrangements are fundamental to the proper functioning of any financial institution and for the financial system they form as a whole.
EU and national legislation require that financial institutions have robust governance arrangements, which include a clear organisational structure, well defined lines of responsibility, effective risk management processes, control mechanisms as well as all standards and principles concerned with setting an institution’s objectives, strategies and risk management framework; how its business is organised; how responsibilities and authority are defined and clearly allocated; how reporting lines are set up and what information they convey; and how the internal control framework is organised and implemented, including accounting procedures and remuneration policies. Internal governance also encompasses sound information technology systems, outsourcing arrangements and business continuity management.
Thus, financial institutions are adopting new governance trends to ensure transparency, accountability and adaptability as the world faces ever-evolving economic and technological challenges.
At a legislative level, one of the key regulations in Europe related to governance in the financial sector is the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) and the Markets in Financial Instruments Regulation No. 600/2014 (MiFIR). These regulations were implemented to improve transparency, investor protection and efficiency in European financial markets. Although MiFID II and MiFIR are primarily focused on markets in financial instruments, they also have significant implications for the governance of financial institutions.
Some relevant aspects of MiFID II in relation to governance include:
- Governance Obligations: establishes specific requirements for governance bodies and risk management in investment services firms. Financial institutions are expected to implement policies and processes that ensure effective and prudent management.
- Transparency requirements: Introduces measures to improve transparency in the execution of operations and the provision of investment services. This relates directly to governance in terms of disclosing clear and understandable information to clients and stakeholders.
- Product evaluation and product governance: Sets out detailed requirements for product evaluation and product governance, ensuring that financial products are designed and distributed appropriately for clients.
- Inducements: Regulates the inducements that investment service providers may offer or receive, which influences remuneration practices and thus internal governance.
Although MiFID II and MiFIR are primarily focused on markets in financial instruments, they also have significant implications for the governance of financial institutions.
In mid-2023, the European Commission published its proposal to amend the MiFID II Directive, among other regulations, which would entail a new framework of obligations for financial institutions. The Retail Investment Strategy (MiFID III) is a proposal for a Directive that will introduce important new features for financial institutions, such as the prohibition of incentives (except for advised sales), and will have a significant impact on the business model and the structure of commissions.
The main effect for the entities will be the need to carry out a new reflection exercise to define their strategy, tactical positioning and the roadmap to be followed.
For the moment, the proposed Directive is being processed until it is approved by the European Parliament, so the published text may be subject to changes, and it is estimated that, if it is approved before May 2024, it could be applicable by the end of 2025 or even 2026.
At the national level, each of the EU member states has been adopting, in accordance with European regulations, regulatory measures in the area of financial governance.
Thus, Luxembourg has implemented the MiFID II Directive and the MiFIR Regulation, which has an impact on the governance of its financial institutions. Luxembourg also has company law laws and specific regulations on corporate governance. These regulations may include requirements on the composition and functions of boards of directors, transparency in decision-making and disclosure of financial information.
As Luxembourg is a major financial and investment fund center, regulations in this sector also address governance issues. Specific legislation, such as the Law on Specialized Investment Funds (SIF Law) and the Law on Collective Investment Schemes (UCI Law), contains provisions related to administration and supervision.
It should also be noted that the Grand Duchy pays special attention to and complies with specific regulations aimed at preventing money laundering and terrorist financing of terrorism, among other financial crimes.
For more information on Luxembourg’s corporate governance regulations, please consult the website of the Commission de Surveillance du Secteur Financier (CSSF).
To close this dossier, we can affirm that the role of corporate governance in financial institutions is essential to ensure stability and confidence in the sector. By analyzing the key trends and elements that define these practices, we can draw significant conclusions.
First, the adoption of diversity in the composition of governing bodies emerges as a fundamental factor in the decision-making process. A board of directors that reflects a diversity of skills and experience is better equipped to navigate the complexities inherent in the financial world.
Effective risk management remains a key to stability. Those institutions that instill a culture of risk awareness, conducting regular assessments and stress tests, are prepared to weather uncertainty and emerge resilient in the face of unforeseen challenges.
Financial institutions are advised to view governance not just as a compliance requirement, but as a dynamic force that drives resilience, innovation and ethical leadership.
Transparency and disclosure stand as the foundation of trust. Financial institutions that are committed to openness, not only in financial reporting but also in decision-making processes, build stable relationships with their stakeholders.
Sustainability has become a fundamental aspect of governance. The integration of environmental, social and governance considerations is no longer a choice, but a strategic imperative. Institutions that lead on sustainability not only demonstrate a commitment to global challenges, but also a keen understanding of long-term financial viability.
In the quest for success, financial institutions are advised to view governance not just as a compliance requirement, but as a dynamic force that drives resilience, innovation and ethical leadership.