Specialised committees

Legal and regulatory framework:

Banking Law: Articles 27 to 34 and 506
Relevant thematic NBB circulars:
International reference documents:
- Guidelines EBA/GL/2021/05 of 2 July 2021 on internal governance => paragraphs 40 to 67
- Guidelines EBA/GL/2021/04 of 2 July 2021 on sound remuneration policies under Directive 2013/36/EU
- BCBS Principles: principle 3

General

Where necessary, the statutory governing body should set up specialised advisory committees to analyse specific issues and advise the statutory governing body thereon. The creation of such committees may not undermine the role of the statutory governing body: decisions are always taken by the statutory governing body, which fulfils its tasks acting as a college.

In order to reinforce the effectiveness of the statutory governing body’s supervision and monitoring of the activities, the operation and the risk profile of the institution, four specialised committees should be set up within the statutory governing body^[1]:

an audit committee,
a risk committee,
a remuneration committee, and
a nomination committee.

These committees are responsible for preparing the decisions of the statutory governing body in their respective areas of competence.

In addition to the committees imposed by the Banking Law, practice shows that institutions also set up other committees, such as a compliance committee, a committee on combating money laundering and terrorist financing, a strategic committee, an investment committee, an ethics committee, etc. In the case of committees related to the supervisory function of the statutory governing body, it is recommended that these committees follow the rules on composition and functioning applicable to the committees required by the Banking Law insofar as possible.

Composition

The specialised committees to be set up according to the Banking Law must comprise only non-executive members of the statutory governing body, in order to strengthen the latter’s supervisory function. The majority of the members of the audit committee must be independent within the meaning of Article 3, 83° of the Banking Law. The other committees should comprise at least one independent director.

As stated in Guidelines EBA/GL/202/05, the committees should have at least three members. Institutions must ensure that the committees are not composed of a group of members who already form another committee. In this respect, the Banking Law also specifies that the same (non-executive) member of the statutory governing body may not serve on more than three committees, for reasons associated with ensuring the availability of directors and with a balanced division of responsibilities between the various non-executive members of the statutory governing body.

The following measures contribute to a proper operation of the committees and are therefore - subject to stricter requirements provided for in the CAC^[2] - recommended as good practice:

the chair of the audit or risk committee is not the chair of the statutory governing body or of any other committee; and
for systemically important institutions and other important credit institutions within the meaning of the SSM Regulation, the chair of each committee is independent, and the majority of the members of the risk, remuneration and nomination committees are independent directors within the meaning of Article 3, 83° of the Banking Law.

The members of the specialised committees must have the following specific expertise described in Articles 28 to 31 of the Banking Law:

Audit committee: the members of the audit committee should have collective expertise regarding the institution’s operations as well as in the area of accounting and audit, and at least one member of the audit committee should be an expert in the field of accounting and/or audit.
Risk committee: the members of the risk committee should individually possess the necessary knowledge, expertise, experience and skills to understand and comprehend the institution’s strategy and risk tolerance. This requirement cannot lead to the exclusion of certain types of training or professional background, but implies that the members must have the necessary professional or academic background to challenge the subjects covered by the said committee.
Remuneration committee: the remuneration committee must be constituted in such a way as to ensure it can give relevant and independent advice on remuneration policies and practices and on the incentives created for risk management, capital requirements and liquidity position.
Nomination committee: the nomination committee must be constituted in such a way as to ensure it can give relevant and independent advice on the composition and operation of the governing and management bodies of the institution, in particular on their members’ individual and collective expertise and their integrity, repute, independence of mind and availability.

As part of its prudential supervision task, the supervisory authority should assess the knowledge and experience of prospective members of the aforementioned committees and should also examine whether the composition and procedures of these committees offer sufficient guarantees to enable them to carry out their duties properly^[3].

Tasks

Audit committee

As specified in Article 28 of the Banking Law, the audit committee should have at least the following tasks as defined in Article 7:99, § 4 of the CAC:

informing the statutory governing body of the outcome of the statutory audit of the annual accounts and, where appropriate, the consolidated accounts, and explaining how the statutory audit of the annual accounts and, where appropriate, the consolidated accounts contributed to the integrity of the financial reporting process, and what the role of the audit committee was in that process;
monitoring the financial reporting process and making recommendations or proposals to ensure its integrity;
monitoring the effectiveness of the institution’s internal control and risk management systems and, where applicable, monitoring the internal audit and its effectiveness;
monitoring the statutory audit of the annual accounts and the consolidated accounts, including following up on questions and recommendations made by the statutory auditor and, where applicable, by the auditor in charge of auditing the consolidated accounts;
reviewing and monitoring the independence of the statutory auditor and, where applicable, of the auditor in charge of auditing the consolidated accounts, in particular with regard to the appropriateness of the provision of additional services to the institution. In particular, the audit committee should analyse with the statutory auditor the risks threatening the latter’s independence and the safeguards applied to mitigate those risks, where the total fees relating to a public interest entity referred to in Article 1:12 of the CAC exceed the criteria set out in Article 4(3) of Regulation (EU) No 537/2014; and
making recommendations to the institution’s statutory governing body for the appointment of the statutory auditor and, where applicable, the auditor in charge of auditing the consolidated accounts, in accordance with Article 16(2) of Regulation (EU) No 537/2014.

Risk committee

The duties of the risk committee are defined in Article 29 of the Banking Law and further specified in Guidelines EBA/GL/2021/05. As such, the risk committee should at least:

advise and support the statutory governing body in its supervisory function regarding the monitoring of the institution’s overall actual and future risk strategy and risk appetite;
assist the statutory governing body in its supervisory function and particularly the non-executive directors in overseeing the implementation of the institution’s risk strategy and the corresponding limits set;
oversee the implementation of the institution’s strategies for capital and liquidity management as well as for all other relevant risks;
provide the statutory governing body in its supervisory function and particularly the non-executive directors with recommendations on necessary adjustments to the risk strategy;
provide advice on the appointment of external consultants that the supervisory function may decide to engage for advice or support;
review a number of possible scenarios, including stressed scenarios, to assess how the institution’s risk profile would react to external and internal events;
oversee the process to ensure the alignment between all material financial products and services offered to customers and the business model and risk strategy of the institution;
examine the pricing policy for customers and ensure that the prices of the products offered reflect the risks that these products may present for the institution, based on its risk strategy, without the need to consider each product separately;
ensure that the prices of assets and liabilities and of the categories of off-balance sheet products offered to customers take into account the risks incurred by the institution in view of its business model and risk strategy, in particular the risks - especially the reputational risks - that could arise from the types of products that are offered to clients. Where this is not the case, the risk committee must provide an action plan to the statutory governing body; and
assess whether the incentives in terms of variable remuneration take suitable account of the risk control, own funds requirements and liquidity position of the institution, as well as with the probability and spread over time of profits.

For more information on this subject, please refer to paragraphs 61 to 63 of Guidelines EBA/GL/2021/05.

Remuneration committee

The tasks of the remuneration committee are specified in Article 30 of the Banking Law. As such, it must at least:

provide an opinion on the institution’s remuneration policy and any changes made thereto. In this respect, the remuneration committee must in particular examine whether the incentives created by the remuneration policy, including the promotion system, are not such as to encourage excessive risk-taking within the institution or promote behaviour which pursues interests other than those of the institution and its stakeholders. It must also ensure that the remuneration policy does not give rise to conflicts of interest, in particular to the detriment of customers to whom certain products are offered;
prepare decisions on remuneration that have consequences for the risks and risk management of the institution and on which the statutory governing body must decide; and
exercise direct supervision of the remuneration of the persons responsible for independent control functions.

However; the remuneration committee may rely on information provided by the risk committee to propose changes to the decisions of the statutory governing body relating to the variable remuneration.

For further information, please refer to Guidelines EBA/GL/2021/04.

Nomination committee

The tasks of the nomination committee are specified in Article 30 of the Banking Law. As such it is tasked at least with:

identifying and recommending for approval by the general meeting, or where applicable, by the statutory governing body, candidates to fill vacancies in the statutory governing body, examining the extent to which knowledge, skills, diversity and experience are distributed within the statutory governing body, and drawing up a description of the tasks and skills required for a particular appointment as well as deciding how much time must be dedicated to the function. ln this context, the nomination committee should draw up policies relating to the suitability, diversity, induction and training of members of the statutory governing body. Furthermore, the nomination committee must establish a target percentage for the representation of the underrepresented gender in the statutory governing body and prepare a plan to increase the number of representatives of this gender in order to reach the target^[4];
periodically, and at least annually, assess the structure, size, composition and performance of the statutory governing body and make recommendations to the statutory governing body with regard to any changes therein;
periodically, and at least annually, assess the knowledge, skills, experience, degree of involvement, including attendance, of individual members of the statutory governing body and of the statutory governing body collectively, and report to this body accordingly;
periodically review the policy of the statutory governing body for selection and appointment of its executive directors, and make recommendations to the statutory governing body.

In addition, the nomination committee is expected to plan the renewal and orderly succession of directors and persons responsible for independent control functions.

For more information on the tasks of the nomination committee related to the suitability assessment, please refer to the NBB’s Fit & Proper Manual.

Functioning

Members of committees should engage in open and critical discussions, during which dissenting views are discussed in a constructive manner.

Committees should document the agendas of their meetings, their discussions, the conclusions of their work and their decision proposals to be submitted to the statutory governing body, and specify the divergent views expressed by its members. Their conclusions and decision proposals should be reported to the statutory governing body.

The statutory governing body establishes each committee’s internal rules of procedure^[5] specifying its tasks, composition and operation (including the drawing up of minutes). The NBB recommends that these internal rules of procedure be annexed to the governance memorandum.

Depending on their competences, committee members should at least:

have access to all relevant information and data necessary to perform their role, including information and data from relevant corporate and independent control functions (e.g. legal, finance, human resources, IT, internal audit, risk management, compliance, including information on AML/CFT compliance and aggregated information on suspicious transaction reports, and ML/FT risk factors);
receive regular reports, ad hoc information, communications and opinions from the persons responsible for independent control functions concerning the current risk profile of the institution, its risk culture and its risk limits, as well as on any material breaches that may have occurred, with detailed information on and recommendations for corrective measures taken, to be taken or suggested to address them, and periodically review and decide on the content, format and frequency of the information on risk to be reported to them; and
where necessary, ensure the proper involvement of the independent control functions and other relevant functions (human resources, legal, finance) within their respective areas of expertise and/or seek external expert advice.

Committees should interact with each other as appropriate. To a limited extent, such interaction could take the form of cross-participation so that the chair or a member of a committee may also be a member of another committee.

Institutions should consider the occasional rotation of chairs and members of committees, taking into account the specific experience, knowledge and skills that are individually and collectively required for those committees.

For reasons of efficiency, external persons (e.g. the chair or a member of the management committee, the internal auditor, the accredited statutory auditor, etc.) may participate in all or part of the meetings of the committees as guests. Nevertheless, the systematic participation of permanent guests (executive directors, non-executive directors who are not members, representatives of the group, etc.) in all meetings of the specialised committees should be avoided, barring duly justified exceptions. It is good practice to ensure that guests participate only in those discussion points that are relevant to them, and that there is always at least one meeting per year without any external persons. The chairs of the committees have an important role to play in this respect in order to safeguard the quality of the debates.

Exemptions for non-significant institutions

The legal obligation to set up the four specialised committees within the statutory governing body, which are composed exclusively of non-executive directors, is not justified for institutions with a reduced risk profile, taking into account their size or the nature of their business. Thus, credit institutions that are not significant within the meaning of Article 3, 30° of the Banking Law, are exempt from the obligation to set up a nomination committee and a remuneration committee, and may combine the audit and risk committees. Institutions combining the two latter committees should document the reasons which led them to set up a combined committee and how this approach achieves the objectives of both committees. Such an institution must at all times ensure that the members of the combined committee, individually and collectively, have the necessary knowledge, skills and expertise to fully understand the tasks to be carried out by this committee.

In the absence of one or more committees, the statutory governing body as a whole is responsible for exercising the functions assigned to the various committees. In that case, the standards laid down in the Banking Law for each of the committees concerned apply to the statutory governing body, regardless of the internal structure set up by this body.

Group context

Article 33, § 2 of the Banking Law authorises the supervisory authority to take into account the group context when authorising a credit institution, where appropriate, not to set up one or more of the four committees which are compulsory by law. In this case, one or more committees which are competent for the credit institution and meet the requirements of the Banking Law should be set up within the groups or subgroups concerned.

Communication CBFA_2009_22 concerning audit committees applies mutatis mutandis to the derogation policy for the establishment of the other committees, provided that account is taken of the specific tasks of each committee.

^[1] Credit institutions which are not significant within the meaning of Article 3, 30° of the Banking Law are exempt from this obligation. For further information, see Articles 33 and 34 of the Banking Law and point 4.1.4.4. of this Manual.

^[2] Article 32 of the Banking Law provides that Article 27 is without prejudice to the provisions of the CAC relating to the audit committee and the remuneration committee in listed companies within the meaning of Article 1:11 of the CAC.

^[3] In this context, care should be taken that the committees are not too small, in order to avoid deadlocks when a member is absent.

^[4] In establishing this target percentage and carrying out subsequent reviews, the nomination committee is expected to receive assistance from the Human Resources department (for the operational aspects) and the compliance function (for the compliance aspects). As a reminder, the target percentage, the plan and its implementation modalities must be made public in accordance with Article 435(2)(c) of Regulation No 575/2013 and disclosed to the supervisory authority to enable it to conduct diversity benchmarking.

^[5] Internal regulations that do not necessarily have to meet the conditions of Article 2:59 of the CAC.