CSSF Circular 20/758 on the central administration, internal governance and risk management of investment firms.

This Circular integrates the latest orientations of the European Banking Authority (“EBA”) and the European Securities and Markets Authority (“ESMA”).

The terminology and definitions of the Circular have been reviewed and clarified.

The main changes compared to CSSF Circular 12/552 concern :

1. the extension of the scope of application to financial holding companies and mixed financial holding companies referred to in Article 49(2) points a) to c) of the law of 5 April 1993 on the financial sector as amended (“LSF”);
2. a focus on the concept of proportionality, through its connection to the concept of systemic establishment within the meaning of the LSF;
3. details on the application of proportionality in the establishment of internal control functions;
4. the strengthening of the management body in its supervisory function through reinforced provisions on diversity and independence;
5. the consideration of environmental, societal and governance risk factors to ensure the viability of the business model.
6. the obligation for the investment firm to have a clear risk-taking process including a formally and precisely defined risk appetite in all areas of activity, a rigorous decision-making process, quality analyses and limits. A strong and pervasive culture of risk and compliance is required within the investment firm.
7. details regarding the role, appointment, involvement and continuing education of the investment firm’s Board of Directors, the importance of the tasks carried out by them and the importance of detailed meeting minutes.
8. outsourcing of internal auditing is only allowed for operational tasks.
9. the chairman of the board of directors may not be an authorized director.

Prudential procedure for the appointment of directors, authorised directors and key functions holders in investment firms

The investment firm now has its own prudential procedure for the appointment of directors, authorised directors and key functions holders and largely based on the existing amended procedure applicable to credit institutions.

The requirements of the procedure derive both from the new CSSF Circular 20/758, the guidelines of the European Banking Authority (EBA/GL/2017/12), the European Directive CRD IV (2013/36/EU), the European Directive MIFID II (2014/65/EU) as well as the LSF.

In addition, non-exhaustively, particular emphasis is placed on (I) the reinforcement of the investment firm ‘s responsibility for the initial and ongoing assessment of the persons concerned, (II) the solid analysis of the potential conflicts of interest due to an appointment and their resolution taken by the authorized directors and board of directors as well as (III) the commitment of the CSSF to communicate the authorisation decisions within three months of the receipt of the file deemed complete by the CSSF.

Anne ROSIER, OF COUNCEL, arosier@feltenlawyers.com