The European directives on the governance of financial institutions will affect Monaco. Franck Biancheri, ex-Government Councillor and founder member of Tempest, consultants in law and finance, gives us his perspective.
Governance encompasses the relations between the management of a company, its board of directors or decision-making body, and third parties. Whilst the Principality of Monaco is not part of the European Union, certain European directives do affect Monaco, either directly or indirectly, as do the principles and practices of governance. Firstly, there are several different European texts, setting out general principles, which explain that good corporate governance is a determining factor in competitiveness. Governance codes exist to help companies achieve objectives related to the growth of the business, and management responsibility. The binding nature of these codes enables the company to develop a culture of responsibility, as stated in certain European texts (the principle of “comply or explain”). Secondly, there are certain European directives which lay down the conditions for banking governance, which apply to institutions in Monaco. This is either because they are generally incorporated into the guidelines of the Monetary and Financial Code, or because they are cited for their prudential standards in some Monegasque texts.
A clear structure
In addition, there is a new section of the Banking Regulations, specifically dedicated to the governance of credit institutions. More specifically, this new chapter clearly establishes the principle for a framework of strong governance, in proportion with the company’s business model and the risk analysis that it carries out. Much of the material was already well known, but some points, relating to organisational governance, monitoring, and control, are new. With regard to the organisation, the required structure of governance has been clarified. It should be based on different specialist committees that vary according to the size of the company. It is essential that the committees are formed of people with the appropriate skills and experience, and their role is evaluated. For example, the risk review and the remuneration committees have roles that are defined by law and must include particular skills, knowledge, and expertise. In the case of the risk committee, this should enable it to evaluate whether or not the prices offered to customers are consistent with the risk strategy of the company. A nomination committee should be established in order to propose candidates for the oversight bodies. It should assess the range of knowledge and expertise, implement annual or periodical reviews, and report back with the results of these reviews. The directors who are responsible for the management of the business must be able to dedicate sufficient time in order to fulfil their duties. This required time is clearly defined by law, and does not only apply to directors, but also to the members of the other management bodies of the company. The rules for expertise and for the training for the term of office of directors, are also specified. Such a system of governance requires that procedures to monitor, control and evaluate it are put into place. These procedures must be set up by the company itself. The risk committee’s role should be supported by recourse, if required, to consulting external experts, in order to execute its functions. It has a role as an advisor to the supervisory bodies, in order to provide good governance and effective strategies.
The effectiveness of the system is also strengthened by mechanisms to promote communication between the different supervisory bodies and the board of directors. The supervisory bodies should regularly review the system of governance and when they conduct this review, they should integrate risks associated with the economic environment. On a higher level, the French Prudential Supervisory Authority has had its powers strengthened so that it can appraise governance systems. These additional powers mainly relate to the strengthening of precautionary measures that can be imposed, if required, to enforce the governance system, or reduce risk. These changes have also had a strong impact on the European financial area. The new rules cover the conformity of products marketed, the inherent costs of compliance when marketing products, criteria for defining remuneration policy for a greater number of stakeholders, monitoring of delegation practices, and in more general terms, the policy for managing risks effectively. All this suggests that the world of governance will continue to change a lot in the years to come.