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Governance of Financial Institutions edited by Busch, Danny; Ferrarini, Guido; van Solinge, Gerard (31st January 2019)

Part I General, 2 Corporate Governance of Financial Institution: In Need of Cross-Sectoral Regulation

Jens-Hinrich Binder

From: Governance of Financial Institutions

Edited By: Danny Busch, Guido Ferrarini, Gerard van Solinge

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 25 August 2019

Subject(s):
Regulation of banks — Investment business

(p. 18) Corporate Governance of Financial Institution

In Need of Cross-Sectoral Regulation

I.  Introduction

2.01  Judging from European legislation adopted in the aftermath of the financial crisis, the case for cross-sectoral regulation of governance arrangements in financial institutions, at first sight, appears almost too evident as to justify closer analysis. ‘Corporate governance’, in this sense, will be understood, for present purposes, as referring to ‘the system by which companies are directed and controlled’ (to borrow from the seminal UK Cadbury Report on the financial aspects of corporate (p. 19) governance),1 which includes, in particular, requirements for the structure and functioning of the board, risk management and internal control arrangements, organizational and procedural aspects of decision making, as well as the enforcement of relevant standards by internal (shareholders, non-executive board members) and external (auditors, supervisory authorities) actors. In recent years, relevant requirements for intermediaries have been adopted, or rather (in many cases) reinforced, not just with regards to banks, investment firms, asset managers, and pension funds—those types of intermediaries covered in the present chapter,2 but also to the insurance industry (covered in Chapter 3) and, to some extent, likewise to ‘payment institutions’ as defined by the revised Payment Services Directive of 2015,3 administrators of benchmarks,4 and operators of financial market infrastructures (FMI)5 (not covered in detail in this chapter).6 In addition (and also outside the (p. 20) scope of the present chapter), special governance requirements apply under Articles 45 and 46 of the Money Laundering Directive of 2015.7 Finally, the adoption of resolution frameworks for insolvent banks (and other financial intermediaries)8 also come with implications for the corporate governance of the relevant firms (outside the scope of the present chapter). Thus, although the cross-sectoral perspective adopted in this chapter is fairly comprehensive, the focus is on parts of a broader phenomenon.

2.02  To be sure, governance-related regulatory requirements, as such, have existed prior to the global financial crisis; in fact, some aspects can be traced back to the very origins of financial regulation in the early twentieth century.9 Yet in response to shortcomings in the governance of financial institutions identified in the run-up to, and during, the global financial crisis, relevant regulations have been reinforced to a considerable extent, and have been expanded into sectors where relevant arrangements had previously been left to the discretion of owners and management, for example, benchmark administrators or FMI operators. As such, this development is hardly surprising, since the financial crisis has increased the awareness of academics and policymakers of the relevance of governance arrangements within intermediaries for the sustainability of their business activities and thus, ultimately, for systemic stability.10 In the post-crisis world, formal and substantive similarities between different sectoral regimes are pervasive, as are identical provisions that can be found in relation to different sectors. This reinforces the impression that the corporate (p. 21) governance of financial institutions is in need not just of sector-specific regulation, but presents more or less the same set of problems. This reasoning has clearly inspired recent regulatory initiatives at the European level, where the governance of financial institutions generally, based on recommendations by the High Level Group on Financial Supervision in the European Union (the de Larosière Group) in 2009,11 has been addressed in a Commission Green Paper as early as 2010.12 It is less dominant among international standard setters, however, where relevant publications—obviously owing to restrictions in the respective institution’s mandate—frequently follow a sector-specific approach.13 Significant exceptions are the Financial Stability Board’s (FSB’s) ‘Principles for Sound Compensation Practices’,14 which address the remuneration of directors and managers in significant financial institutions, and, in particular, the Principles of Corporate Governance, which were first promulgated by the Organisation for Economic Co-operation and Development (OECD) in 1999 and updated, jointly with the G20, in 2015.15 Among relevant international standards, this latter publication occupies a unique position in that it is not confined to financial intermediaries at all, but takes a much more general perspective by defining standards for ‘publicly traded companies, both financial and non-financial’. Moreover, ‘[t]o the extent [the principles] are deemed applicable, they might also be a useful tool to improve corporate governance in companies whose shares are not publicly traded’.16 The G20/OECD Principles, in other words, reflect the notion that, while financial intermediaries may present specific problems that potentially require technical deviations from general standards, their corporate governance is nonetheless sufficiently aligned with arrangements in non-financial firms as to merit a comprehensive, generalized treatment. This, in turn, may help to explain why the Principles have not just been influential for the Basel Committee on Banking Supervision’s (BCBS) ‘Corporate Governance Principles for Banks’17 and formative for the EU Commission’s position articulated in the 2010 Green Paper,18 but (p. 22) have also been designated as one of the FSB’s ‘Key Standards for Sound Financial Systems’19 and, as such, form the basis of periodic assessments of member jurisdictions in the FSB’s thematic reviews.20

2.03  On closer inspection, however, the picture turns out to be far from clear-cut. Despite the obvious trend towards cross-sectoral convergence of governance-related regulations, the available literature, both theoretical and empirical, focuses mainly on the corporate governance of banks.21 With the exception of a few studies on the governance of investment funds, only few analyses have been devoted to the governance of non-bank financial intermediaries22 and operators of financial market infrastructures,23 respectively, which casts some doubt on the rationale for cross-sectoral approaches to governance-related regulation for different types of intermediaries (and FMI providers). In view of—evident—differences between business models, ownership, and group structures, and, consequently, also between the risk profiles across the different sectors, the case for a cross-sectoral perspective appears weaker still. Indeed, in a recent proposal for the reform of the regulatory framework for investment firms, the European Commission suggests nothing less than a departure from the established cross-sectoral framework for the corporate governance for banks and investment firms, including, in particular, substantial reductions in the applicable requirements for non-systemically important investment firms.24

2.04  Seen against this backdrop, the recent convergence of governance-related requirements across the different sectors should be interpreted not as a consequence of agreed lessons learned during the crisis years, but rather as a conundrum in terms of both the underlying rationale and the design of technical solutions. In view of the differences mentioned before, cross-sectoral governance-related regulation is, in fact, in need of justification, and the literature available so far falls short of providing it. Essentially, four fundamental questions can be distinguished: First, are corporate governance arrangements a problem for financial institutions at all? Second: If so, are the relevant problems different from non-regulated, non-financial companies, and (p. 23) why? Third: If the answer to the first two questions is in the positive—are the relevant problems of a genuinely cross-sectoral nature, as the convergence of applicable requirements suggest, that is, are they present, in the same or at least in a similar form, across the board of intermediaries of all types? And fourth: If that is the case, to what extent can and should regulatory responses also be cross-sectoral in nature? Only the first two questions have been addressed comprehensively—but with a focus on banks and, therefore, not exhaustively—in the relevant literature so far,25 while the answer to the latter, as noted earlier, appears to have been taken for granted at least in European legislation. If the answer to the third and fourth questions were to be in the positive, one possible, and potentially far-reaching, policy implication could be a readjustment in the structure of EU financial regulation generally. If and to the extent that the case for cross-sectoral regulation of governance-related issues—as has been suggested rather forcefully also for the regulatory framework for investor protection through conduct-of-business and transparency requirements26—is found to be sufficiently strong also in the area of governance-related requirements, the rationale for sector-specific regulation would be called into question, and at least parts of existing secondary and tertiary legislation could (and, in the interest of more transparent, streamlined regulation, perhaps should) be consolidated into a single regulatory instrument for cross-sectoral application.27 In other words: If relevant provisions (p. 24) across different sectoral regulations are found to be converging, could their replacement by, and consolidation into, a single legislative act be advantageous and more efficient, possibly not just for the regulated firms but also in terms of enforcement and, ultimately, in the interest of clients? In view of the drastically increased level of complexity of post-crisis financial regulation within the European Union, this could potentially facilitate a more than welcome streamlining of the existing body of regulations without losses to the substantive content. Even under the existing frameworks, evidence supporting cross-sectoral regulatory approaches could be beneficial, in that it would support convergence of interpretation and enforcement standards, as well as cross-references between the different regimes, and thereby enhance legal certainty for regulatees even to the extent that the wording of the different legal instruments differs. At the very least, a higher level of convergence of substantial requirements could improve the organization of cross-sectoral groups of intermediaries and help reap efficiency gains, for example in terms of application processes and supervisory scrutiny with regard to the election of board members with mandates in different intermediaries and the composition of the respective boards.

2.05  In this light, the present chapter presents a comparative cross-sectoral introduction to the relevant problems and literature, but also seeks to prepare the ground for future research by outlining a conceptual framework for a functional analysis of the relevant provisions and the underlying policy rationale. The remainder of the chapter is organized as follows: Section II below starts with a comparison of the existing approaches to regulating the corporate governance of relevant intermediaries. On this basis and against the backdrop of the post-crisis literature on governance problems in the financial sector, section III then turns to a functional analysis of the underlying policy objectives. Section IV concludes.

II.  Taking Stock: Governance-Related Regulation in EU Legislation after the Global Financial Crisis

A.  Relevant legal sources

2.06  Governance-related regulation of banks, investment firms, asset managers, and pension funds in Europe, for historical reasons, has taken the form of a rather intricate—and idiosyncratic—mix of sectoral and cross-sectoral approaches, which, to the present day, continues to be heavily influenced by the European approach to regulate both universal and specialized commercial and investment banks within a single legislative framework. As of today, governance-provisions are not just laid down in the relevant Level 1 instruments for banks, investment firms, asset (p. 25) managers, and pension funds, but also in Level 2 instruments (regulations and directives). To get the full picture, it is important to note that this regime has, in several respects, also been complemented by Level 3 instruments.

2.07  The most comprehensive set of regulations is to be found in the CRD IV, the current version of the prudential Capital Requirements Directive,28 which applies in relation to banks—‘credit institutions’ engaging in the business of taking deposits and granting credits29—as well as investment firms.30 For banks and investment firms in Europe, governance-related regulation had assumed its present role as a cornerstone of prudential requirements, and integral part of regulation addressing both the funding structure and organizational aspects, already prior to the global financial crisis, mainly with the transposition of the Basel II capital accord of 200431 into European law by the CRD I package in 2006.32 By contrast, the Second Banking Law Directive 198933 had provided for only a few rudimentary requirements in this regard.34 Starting with the Investment Services Directive 1993,35 prudential regulation of credit institutions within Europe has been extended, path-dependently, also to ‘investment firms’, that is, firms engaging in a list of specified securities-related activities now set out in Annex I MiFID II,36 now including, in particular, portfolio management and the provision of investment advice, the execution of orders on behalf of clients, dealing on own account, but also underwriting of and placement services to issuers of securities and, ultimately, the operation of certain types of financial (p. 26) market infrastructures (‘multilateral trading facilities’, ‘organised trading facilities’). Interestingly, the equal treatment of credit institutions and investment services, from the beginning to the present date, has only to a lesser extent (if at all) been based on a cross-sectoral analysis of the risks associated with the respective business models, and rather sought to remove anti-competitive imbalances between the regulatory frameworks for universal banks and specialized (investment) banks following the introduction of harmonized prudential standards for credit institutions.37 Upon completion of the present manuscript, it remains to be seen to what extent this approach will be changed under the Commission proposals for greater differentiation between banks on the one hand and non-systemically important investment firms on the other.38

2.08  At the same time, ‘investment firms’ as defined in European regulation (which may include specialized firms engaging only in the provision of investment services, but also universal banks providing investment services and simultaneously licensed as credit institutions under the CRD IV/CRR regime) have been subject to additional sector-specific governance-related regulations, which reflected US American precedents39 and were set out, first, in the Investment Services Directive 1993, subsequently in the first Markets in Financial Instruments Directive of 200440 and the implementing Organisational Requirements Directive of 2006,41 and are presently stipulated in several provisions of MiFID II, which have been specified further in in the supplementing Regulation 2017/565.42 Thus, the governance of investment firms is effectively covered by a two-tiered combination of general, cross-sectoral prudential requirements (for ‘credit institutions’ and ‘investment firms’) with specialized, sectoral requirements addressing specific problems of firms qualifying as investment firms under MiFID II.

2.09  By comparison, the regulatory landscape for asset managers within the EU looks rather straightforward. To the extent that the industry is not covered (qua provision of ‘portfolio management’ services) by MiFID II, the relevant requirements are to be found mainly in the revised regime for the regulation of Undertakings for Collective Investment in Transferable Securities (UCITS). While the first version (p. 27) of the UCITS Directive, enacted in 1985, came with rather rudimentary fit-and-proper requirements for the directors of a UCITS,43 a more complex regime is now set out in the recast version of 2009,44 in conjunction with the Implementing Directive 2009/65/EC,45 which seeks to align the relevant requirements, ‘to the greatest possible extent’, with the corresponding standards under the MiFID II regime.46 In addition, managers of Alternative Investment Funds (AIFM) are subject to the relevant provisions of the AIFM Directive,47 in conjunction with Chapter III of Delegated Regulation (EU) 231/2013.48 This includes also specialized AIFs subject to separate legislation (European Long-Term Investment Funds,49 Venture Capital Funds,50 and Money Market Funds51), which broadly follow the same rules.52

(p. 28) 2.10  Lastly, pension funds, insofar as they do not fall within the scope of any of the above legal instruments, have been regulated separately within Europe, beginning with the first Directive on the activities and supervision of institutions for occupational retirement provision in 2003,53 now—with a substantial expansion of governance-related provisions—recast as Directive 2016/2341.54

B.  Board-related requirements

1.  Board qualification and board composition

2.11  For banks as well as other intermediaries, minimum requirements for the qualification of board members have been in place long before the financial crisis, but—at least, with regard to some sectors and particularly for banks—have since become much more granular and multifaceted. In addition to general requirements pertaining to the reputation of office-holders, designed so as to prevent persons with a criminal or otherwise negative record to enter the relevant positions, and standards for their qualification, both in order to enhance the safety and soundness of the relevant intermediaries’ financial position and client assets, the post-crisis reforms have come to follow a broader approach and now address, for credit institutions and investment firms covered by CRD IV55 as well as for market operators,56 also the composition of the board as a whole, including diversity policies.57 This is fully in line with, and clearly has been inspired by, international standards,58 but is not uncontroversial especially insofar as requirements for gender diversity among board members are concerned.59 To date, the regulatory frameworks for other sectors have not followed suit in this regard. This leaves matters of board composition entirely to the discretion of the regulated firms on the one hand and the control by supervisory authorities on the other hand, but the scope for supervisory intervention is clearly limited by the absence of a statutory basis comparable to that for banks.

(p. 29) 2.12  Irrespective of these developments, it can be observed that individual requirements for board members differ from sector to sector, ranging from rather broad principles, which reflect general criteria also used with regard to other sectors, to detailed sector-specific specifications included in Level 1 or Level 3 instruments. By comparison, the regulatory framework for credit institutions and investment firms set out by the CRD IV stands out in this regard. This is probably attributable to perceived governance failures specifically in banking institutions during the financial crisis,60 but the resulting cross-sectoral imbalances in terms of the ‘granularity’ of standards certainly prevent the emergence of clear-cut, reliable criteria for the interpretation and enforcement of the relevant standards. This may come with significant distortions for competition in the financial industry as a whole, although probably less in terms of competitive equality between firms operating in different sectors61 than in terms of cross-border competition between firms operating in different European jurisdictions, where the relevant standards set out in the different Level 1 instruments, in the absence of specifications at least at Level 3, may come to be interpreted very differently by the relevant competent authorities.

2.13  To illustrate the above findings and considerations, Table 2.1 below compiles information on individual requirements (reputation and qualification) for the different sectors, with the last line (‘granular’) indicating whether relevant requirements go beyond general principles (‘fit and proper’, ‘good repute’, ‘qualified’, etc.):(p. 30)

Table 2.1  Individual requirements for directors and managers

Credit institutions / investment firms (CRD IV regime)

Investment firms (MiFID II)

Asset managers (UCITS, AIFM)

Pension funds (IORP Dir)

Level 1

Art 91 CRD IV

Art 9(6), for market operators Art 45(1)

Art 7(1)(b) UCITS Dir, Art 8(1)(c)

Art 22(1) IORP Dir

Level 2

n/a

n/a

n/a

n/a

Level 3

ESMA/EBA Guidelines on Suitabilitya

n/a

n/a

Other

EBA Q&A; ECB Guide (for SSM)b

n/a

n/a

n/a

granular

yes

no

yes

yes

a  European Securities and Markets Authority (ESMA) and European Banking Authority (EBA), ‘Final Report: Joint ESMA and EBA Guidelines on the Assessment of the Suitability of Members of the Management Body and Key Function Holders under Directive 2013/36/EU and Directive 2014/65/EU’ (EBA/GL/2017/12), 26 September 2017.

b  European Central Bank (ECB), ‘Guide to Fit and Proper Assessments’, 16 May 2017.

To be sure, Table 2.1 has its limits, and should be read with caution. In order to get the full picture, a more detailed comparison would be required, which is outside the scope of the present chapter (while other chapters in this volume will explore the relevant details). It should be noted, however, that a certain degree of consistency between the different legal instruments examined above is undisputable; in all sectors covered, the reputation and qualification of board members clearly has been identified as a problem requiring regulatory intervention, resulting at least in a core set of general fit and proper requirements that have been formulated in very similar, if not identical, terms in the different Level 1 instruments. This should not be read as evidence of full convergence, however. As will be examined more closely in Chapter 8 in this volume, qualification requirements, even where formulated as a broad principle that reappears in the legal frameworks for different sectors, should not be interpreted as identical with one another, and most certainly will not be enforced as such in supervisory practice either. For even in the absence of more granular requirements (i.e., outside the CRD IV regime, where relevant Level 1 provisions have been complemented by Level 3 Guidelines), the general standard (‘sufficient experience’ or similar variations) does not stand alone, but is expressly linked to the specific duties arising with regard to the specific activities regulated under the relevant framework.62 In other words: Even if, and to the extent that, the different legal instruments employ the same language, this should not be misinterpreted as reflecting a truly cross-sectoral standard. Thus, the qualification of directors and senior managers will inevitably (and most convincingly) be assessed not on the basis of abstract, generic criteria, but with regard to the specific duties arising out of the different business models and risk profiles for each specific sector. If, for example, a person, owing to her individual experience in the banking sector, can demonstrate adequate skills and experience as a bank director, this does not automatically qualify her for positions of similar seniority in the fund industry, and vice versa. It is perhaps in this regard that an in-depth analysis of the rationale for greater convergence of standards—and the removal of what could be classified as ‘unsubstantiated differentiations’ without justification in the practical differences between different sub-sectors—could play the most important role.63

2.  Remuneration policies

2.14  In response to concerns about remuneration standards more aligned with the self-interest of senior bank staff (and the short-term interests of bank owners) than medium- and long-term sustainability, regulatory requirements for the design of (p. 31) remuneration policies within intermediaries have come to be recognized as a core element of post-crisis financial reforms. Just as with regard to board-related requirements in general, this mirrors broader international trends.64 Specifically within Europe—as evidenced, for example, by the European Commission’s 2010 Green Paper,65 the regulation of remuneration practices, while sector-specific in terms of the relevant legal instruments, has been developed broadly along similar concepts, with close parallels between the different regimes. At the same time, given residual differences in business models, risk structures and, consequently, in the incentives for managers, the regulation of remuneration policies and practices presents a particularly interesting case for further research into the merits and limits of cross-sectoral regulation. While a more detailed analysis will be presented in Chapter 11 of the present volume,66 Table 2.2 below summarizes the relevant provisions:(p. 32)

Table 2.2  Remuneration requirements

Credit institutions / investment firms (CRD IV regime)

Investment firms (MiFID II)

Asset managers (UCITS, AIFM)

Pension funds (IORP Dir)

Level 1

Arts 74(1), 75, 92–95 CRD IV; Art 450 CRR

Arts 9(2)(c), 23(1), 24(10)

Art 14a and b UCITS Dir; Art 13 AIFM Dir

Art 23 IORP Dir

Level 2

COM Del Reg (EU) No 527/2014 of 12 March 2014 (OJ L148/,21)

COM Del. Reg. (EU) 2017/565 of 25 April 2016 (OJ 87/,1), Art 27

n/a

n/a

Level 3

EBA Guidelinesa

ESMA Guidelinesb

ESMA Guidelinesc

Other

EBA Q&A

n/a

n/a

granular

yes

yes

yes

no

a  EBA, ‘Guidelines on Sound Remuneration Policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and Disclosures under Article 450 of Regulation (EU) No 575/2013’, 21 December 2015 (EBA/GL/2015/22), and EBA, ‘Guidelines on the Remuneration Benchmarking Exercise’, 16 July 2014 (EBA/GL/2014/08).

b  ESMA, ‘Final Report: Guidelines on Remuneration Policies and Practices’, 11 June 2013 (ESMA/2013/606).

c  ESMA, ‘Final Report: Guidelines on sound remuneration practices under the AIFMD’, 11 February 2013 (ESMA/2013/232); ESMA, ‘Final Report: Guidelines on sound remuneration practices under the UCITS Directive and the AIFMD’, 31 March 2016 (ESMA/2016/411).

3.  Board responsibilities, organization of the board, and performance standards

2.15  By contrast, regulatory requirements specifying the responsibilities and the organization of the board and defining performance standards have not become ubiquitous in the sub-sectors covered by the present chapter, but continue to be restricted mainly to the regulation of credit institutions under the CRD IV package and, to a much lesser extent, in additional requirements complementing those arising under the CRD IV, under MiFID II. In view of the differences in terms of legal forms and organizational structures between the different sub-sectors, this discrepancy is particularly illustrative of the limits to cross-sectoral governance-related regulation in general. Table 2.3 below summarizes the relevant provisions:(p. 33)

Table 2.3  Requirements pertaining to board responsibilities, board organization, and board performance

Credit institutions / investment firms (CRD IV regime)

Investment firms (MiFID II)

Asset managers (UCITS, AIFM)

Pension funds (IORP Dir)

Level 1

Arts 76 (treatment of risks, including risk committee), 88(1) (responsibility of management body with regard to governance arrangements)ss, 88(2) (functions of nomination committee), 91(2) (sufficient time to be devoted to mandate), 91(8) (required standard of care of board members), 95 (remuneration committee) CRD IV

Art 9(3) (responsibilities of management body) MiFID II

Annex II (3) AIFMD (remuneration committees required in significant AIFMs)

n/a

Level 2

n/a

n/a

n/a

n/a

Level 3

EBA Guidelines on internal governancea

n/a

n/a

n/a

Other

n/a

n/a

n/a

n/a

granular

yes

no

no

n/a

a  EBA, ‘Final Report: Guidelines on Internal Governance under Directive 2013/36/EU’ (EBA/GL/2017/11), 26 September 2018, 24 and 26–9.

C.  Control of shareholders and owners of qualifying holdings

2.16  Restrictions for the acquisition of ‘qualifying holdings’ (i.e. holdings exceeding certain quantitative thresholds that facilitate a special influence on the relevant institution’s management) have played an important role in the governance-related regulation of credit institutions ever since the Second Banking Law Directive of 1989.67 Supervisory scrutiny of shareholders and owners of qualifying holdings, both as part of the authorization process and on an on-going basis, has since also been applied with regard to other sub-sectors, including those outside the scope of the present chapter. While both the underlying policy objectives and the relevant qualitative standards and technical procedures are similar, the requirements nonetheless provide yet another example for the limits of cross-sectoral regulation. As summarized in Table 2.4 below, the differences between the regimes are substantial:

Table 2.4  Requirements pertaining to the control of shareholders and owners of qualifying holdings

Credit institutions / investment firms (CRD IV regime)

Investment firms (MiFID II)

Asset managers (UCITS, AIFM)

Pension funds (IORP Dir)

Level 1

Art 14 (authorisation process), Arts 22–27 (acquisition of holdings) CRD IV

Art 10 (authorisation process), Art 11 (acquisition of holdings) MiFID II

Arts 7(6)(c) and 8 UCITS Dir; Art (1)(d) AIFM Dir.

Level 2

COM Implementing Reg (EU) 2017/461 of 16 March 2017 on the consultation process btw. relevant competent authorities (OJ L72/ 57)

n/a

n/aa

Level 3

n/a

n/a

Other

EBA Q&A

n/a

n/a

granular

yes

no

no.

a  Article 8(6)(a) of AIFM Directive envisages the development of RTS specifying the requirements for shareholders and owners of qualifying holdings, but such standards are yet to be promulgated.

D.  Risk governance, internal audits and compliance

2.17  Organizational duties pertaining to the managing of risks have been a core element of financial regulation for some time, again: well beyond the global financial crisis, (p. 34) where risk management arrangements within banks were widely seen to be deficient.68 Just as with the reputation and qualification of board members, risk management requirements, at first sight, appear to have become a commonplace feature in European financial regulation generally (and are, again, not confined to those types of intermediaries covered by the present chapter, but have also been enacted with regard to, inter alia, insurance companies,69 administrators of benchmarks,70 and operators of central counterparties71).

2.18  On closer inspection, however, the differences between the various sectors are at least as striking as with regard to board-related requirements. For credit institutions and investment firms covered by the CRD IV in particular, the risk management requirements are extremely complex. They include institutional provisions (on the creation of a risk committee and a risk function with a highly prescriptive set of specifications for its organization and duties72), corresponding board duties,73 and procedural aspects.74 Under MiFID II, these provisions are supplemented by even more detailed requirements addressing specific problems of risk management in the provision of regulated investment services.75 Sector-specific, albeit less detailed risk management requirements, also apply to asset managers under Article 51 of the UCITS Directive, Article 15 of the AIFM Directive, and Article 25 of the IORP Directive. By contrast—unlike for investment firms under the MiFID II regime,76 IORPs77 (and, e.g. insurers78)— detailed institutional requirements for the internal audit function have not been adopted for credit institutions under CRD IV. However, specific duties for the internal audit function of credit institutions and investment firms are provided with regard to certain capital requirements.79 Finally, only investment firms covered by MiFID II80 are subject to specific organizational duties with regard to the creation of a compliance function. These differences are summarized in Table 2.5 below.(p. 35)

Table 2.5  Requirements pertaining to risk governance, internal audit and compliance

72

Credit institutions / investment firms (CRD IV regime)

Investment firms (MiFID II)

Asset managers (UCITS, AIFM)

Pension funds (IORP Dir)

Level 1

Arts 73–101, 123(2) CRD IV

(part of SREP framework)

Art 16 MiFID II

(general organisational requirements)

Art 51 UCITS Dir, Arts 15 and 18 AIFM Dir

Art 24(1), 25, 26, and 28 IORP Dir

Level 2

n/a

Arts 21–24 Del Reg 2017/565

Arts 9–12, 38–45 Implementing Dir. 2010/43a

Level 3

EBA Guidelines on internal governanceb

Other

n/a

n/a

n/a

n/a

granular

yes

yes

yes

yes

a  Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company, OJ L 176/1.

b  See ‘Final Report: Guidelines on Internal Governance under Directive 2013/36/EU’ (EBA/GL/2017/11), 26 September 2018, 29, 32–43. For a detailed assessment (in German), see Peter O Mülbert and Christian Wilhelm, ‘Risikomanagement und Compliance im Finanzmarktrecht – Entwicklung der aufsichtsrechtlichen Anforderungen’, ZHR Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht (2014), 502, 178.

E.  Preliminary findings

2.19  Comparing parallels and differences between the board-related and risk-management requirements examined above, the general impression of cross-sectoral convergence of relevant standards sketched out in the introduction to this chapter gives way to a more nuanced approach. Especially with regard to what has been referred to as ‘granularity’ above, that is, the degree to which broad principles are complemented by more granular technical requirements, the differences between the regulatory requirements for the individual sectors remain considerable—enough, in fact, as to cast doubt on the assumption that a trend for greater convergence of relevant standards—at least below the surface created by general categories like ‘fit and proper requirements’, ‘risk management’, etc—actually exists. At any rate, if there is a case for genuine cross-sectoral regulation of the corporate governance at all, it does not follow from the simultaneous existence of provisions addressing broadly similar aspects of the internal governance of financial firms as such, which, at the technical level, differ markedly in many cases. If anything, this suggests that the case for or against cross-sectoral approaches probably cannot be assessed without differentiation across the board of governance-related regulation as a whole, but has to be evaluated on a case-by-case basis, with a view to the functional characteristics of each sector and, in particular, the relevant business models and risk profiles. (p. 36) Particularly risk management requirements are a case in point: The (trivial) fact that the provision of financial services is associated with risks across the different sectors, and that such risks need to be monitored in order to ensure the financial soundness of each individual firm, does not support the conclusion that adequate arrangements could, or should, be the same or even similar across the board, as the relevant types of risks are different and therefore need a differentiated response. By contrast, the case for convergence may be more compelling with regard to institutional aspects, for example the reputation and qualification of board members and board infrastructure, but even in this regard, as has been noted above, a nuanced approach is in place in existing regulation, and justifiable in view of existing differences between business models and risk profiles.

III.  The Case for Cross-Sectoral Governance-Regulation Re-examined—A Functional Approach

A.  Cross-sectoral regulation on a sectoral basis? The traditional focus on banks and its limits

2.20  The preliminary findings summarized clearly before do not support the case for cross-sectoral governance-related regulation for financial firms without qualifications. This impression is reinforced rather than removed by the available empirical and theoretical literature on the governance of financial institutions. To be sure, despite the differences between the sectoral frameworks observed earlier, financial regulation within the European Union, as evidenced in the Commission’s Green Paper of 2010, builds on the assumption that sectoral characteristics and resulting needs for technical adjustments of general concepts and solutions should not obscure fundamental similarities between financial firms in different sectors and that, consequently, governance problems and the resulting need for regulation should be interpreted as genuinely cross-sectoral in nature.81 This assumption, which is also characteristic for the preparatory Commission Staff Working Document published in the same year,82 may well turn out to be rather ill-founded, however.

2.21  To begin with, as noted before, it is all too easily forgotten that the available empirical literature on governance failures in the run-up to the global financial crisis (understandably) focuses on banks, without even discussing whether similar problems could be expected in other sectors as well.83 Given that (i) governance failures (p. 37) were not observed in the same form across all different sectors and that (ii) business models, corporate structures, and resulting risk profiles evidently differ markedly, this would, at the very least, caution against uncritical transposition of bank-related findings to other types of intermediaries. In order to build and substantiate the case for cross-sectoral regulation, cross-sectoral empirical evidence would be required, which appears to be inexistent to date, at least at the European level.84

2.22  From a more theoretical point of view, the fundamental policy rationale for governance-related regulation of banks and the analysis of more technical governance problems within banks do not provide a more solid rationale for cross-sectoral regulation either. In this respect, the traditional analysis of the problems of debt governance in banks provides a particularly illustrative starting point. It is well accepted that the prudential regulation of credit institutions is warranted because, in addition to common agency problems between shareholders and management in place in public companies generally, control of management by debtholders is uniquely weak in banks as a result of the specific debt structure made up, to a substantial degree, by deposit holders with little financial sophistication and very limited bargaining power.85 The same analysis cannot, however, be applied without alterations to investment firms engaging in portfolio management, where even the full-fledged financial failure of the firm does not automatically expose its clients to losses. Even with asset managers, the situation is not altogether clear-cut. To be sure, fund investors (who, incidentally, are not debtholders but shareholders) may, and frequently will, fall victim to information asymmetries prima facie similar to those encountered by bank depositors, and thus do not seem to be in a strong position to exercise effective control over the management and reduce its incentives for excessive risk-taking. As has been argued with regard to the fund industry in the United (p. 38) States, however, fund governance may turn out to differ from governance structures both in unregulated public companies generally and in other types of financial intermediaries because of fund investors’ redemption rights, which allow them to withdraw their capital on short notice and thereby to effectively discipline an ill-performing management.86 In this context, it is important to note that another key rationale frequently cited in support of special governance-related regulation of banks—the opacity of banking activities and business models, which reduces debtholders’ ability to monitor, and discipline, management yet further87—does not apply to the same extent to all types of financial companies either.

2.23  To conclude, it is worth recalling that the above considerations are directly related to differences in the corporate (and funding) structures as well as the business models that have been hinted at before. It is certainly possible to identify common economic functions in the abstract, which are performed by different types of intermediaries alike, for example, to borrow from a prominent analysis, ‘(i) maturity intermediation; (ii) reducing risk via diversification; (iii) reducing the cost of contracting and information processing; and (iv) providing a payments mechanism’.88 While this analysis has its conceptual merits, it is important to note, for present purposes, that not all types of intermediaries (and other market participants or providers of market infrastructure) do engage in all of these activities, which again weakens the case for equal regulatory treatment.89 Much the same applies to the wide range of risks incurred in the pursuit of the respective business models.90 If the risk profile of diverse types of intermediaries is entirely different, this further weakens the case for cross-sectoral regulation from a functional approach too. Consequently, even if risk management, as such, can probably be agreed to be crucial for the safety and soundness of all types of financial intermediaries,91 the practical implications for the technical design of risk-management arrangements within the regulated firms as well as for the design and calibration of relevant regulations are limited, because both would still have to be tailored to the sector-specific needs.

(p. 39) B.  Governance-related regulation in the interest of systemic stability and depositor/investor protections

2.24  If, as argued above, neither the empirical nor the theoretical literature bears out a fundamental shift from sectoral to cross-sectoral regulation, this does not imply that no common rationale for the regulation of the corporate governance of financial firms can be identified at all. At a rather abstract level, the justification of governance-related regulation is, in fact, rather intuitive, and it is indeed identical for each particular sub-sector: Regulatory intervention pertaining to the internal governance is justifiable if, and to the extent that, governance failures are likely to cause negative externalities in terms of systemic stability and/or losses to (equity or debt) investors. Seen this way, governance-related financial regulation simply can be interpreted as an attempt to activate pre-existing governance arrangements within the regulated firms in order to enhance the stability and soundness of these firms in the public interest, essentially as a form of ‘management based regulation’.92 In this way, governance-related regulation, which prescribes qualitative standards for the design of internal processes in the regulated firms rather than prescribing substantive specific duties and obligations, can be perceived as a form of ‘meta-regulation’, which activates the regulatees’ self-interest in accomplishing socially desirable results.93 At least to some extent, this is also reflected in the regulatory agenda defined in the European Commission’s Green Paper of 2010, which has identified systemic crises and resulting problems for stakeholders (including not just depositors, investors, policyholders, and other creditors but also the taxpayers), as a direct consequence of governance failures.94

2.25  While it could be mistaken as trivial, this rationale certainly offers a coherent and potentially even plausible justification for governance-related regulation as such. In this sense, the regulation of financial intermediaries can certainly be described as stakeholder-driven, be it in the form of capital adequacy, liquidity, or governance-related requirements. At the same time, it should be noted that the focus on systemic stability concerns on the one hand and individual stakeholder protection on the other hand could give rise to at least three misunderstandings, with potentially far-reaching consequences on policy design.

2.26  First, it is worth noting that externalities for both types of interest associated (either directly or indirectly, as a result of domino effects) with the failure of financial institutions do not by themselves justify governance-related regulation. As has been recalled before, the empirical link between deficiencies in governance arrangements (p. 40) and firm performance, with the possible exception of risk management, is rather weak even for the banking sector and, absent empirical evidence, almost non-existent for other sectors, which at the very least calls for further research. In other words: The case for governance-related regulation would be convincing only if and to the extent that the underlying assessment of governance failures were to be corroborated by empirical evidence, which is presently not the case.

2.27  Secondly, as pointed out repeatedly in the present chapter, even if the case for governance-related regulation (generally or with respect to individual) could be substantiated more forcefully than is presently possible, this would not inevitably support the need for cross-sectoral regulation. If the protection of public interests, including, for that matter, the interests of investors and other creditors, requires regulatory intervention in the form of governance-related requirements across the board of different types of financial intermediaries, it does not automatically follow that such regulation should be the same in form and content.

2.28  Thirdly, and perhaps most importantly, none of the findings above support the conclusion that the governance structure of financial institutions as a whole can, or should be, qualified as genuinely stakeholder-oriented and thus as fundamentally different from non-regulated public companies. While public regulation subjects the regulated industry to specific duties and obligations with regard to the various aspects of governance arrangements examined above, these requirements, as discussed before, generally build on general principles of company law, and thus reinforce duties that would also, in principle, apply in non-regulated companies.

2.29  In other words: regulatory requirements and general principles of company law can, at least to a significant extent, be said to complement, rather than conflict with, each other.95 Irrespective of the special nature of governance-related regulation for financial institutions, which by far surpasses general company law in terms of complexity and prescriptiveness, it is therefore not incorrect to conclude that financial institutions, at least if organized in the form of public companies, ‘are not fundamentally different from other companies with respect to corporate governance, even though there are important differences of degree and failures will have economy-wide ramifications’.96 To be sure, this statement could be criticized on the grounds that it fails to acknowledge the fundamental impact of stakeholder-oriented regulation on corporate behaviour in general and board (p. 41) decisions in particular.97 In fact, it would surely be problematic if the applicable regulations had no such effects. Nonetheless, the conclusion, prominently stated by the BCBS, that governance-related regulation effectively results in a full-fledged shift in paradigm compared to general company law—from shareholder- to stakeholder oriented governance, with board duties focusing on stakeholders’ (depositors’, investors’) best interests98—not only overstates the relevance of stakeholder interests, but simply fails to acknowledge the limits of existing stakeholder-oriented regulation within the general framework of company law, and the systematic relationship between these two regimes. If, as highlighted before, and to the extent that governance-related financial regulation can be implemented without structural conflicts within the corporate constitution (as prescribed by general company law), the mere existence of such requirements certainly limits the board’s discretion with regard to design of internal procedures that would otherwise apply, but it is not in itself sufficient to remove the focus on shareholder interests altogether.99

IV.  Conclusions

2.30  The prima facie assumption that governance-related regulation has been converging for the different types of financial intermediaries is misleading. The case for a shift towards integrated cross-sectoral regulatory strategies is thus less compelling than would appear at first sight. Yet these findings should not be interpreted as an outright dismissal of such plans. The fact that the substance of relevant requirements has been converging not just with regard to banks, investment firms, asset managers, and pension funds, but also with regard to insurance companies and FMI operators is, as such, undeniable, which indicates that, despite residual differences between the sectors, some common ground still exists. Moreover, the case for simplification of the regulatory frameworks, which has been cited as a potential rationale for enhancing cross-sectoral consolidation above, is, as such, entirely unaffected by the findings just summarized. Specifically, surely not all differences in form and substance of the corresponding requirements across different sectoral (p. 42) regimes can be explained, and justified, by residual differences in terms of corporate structures, business models, risk profiles, etc. Procedural requirements in particular, such as general principles on board information, documentation obligations, and fundamental board obligations, seem particularly well-suited for cross-sectoral consolidation, and partly have been treated as such in existing regulation. As indicated above, however, the rationale, prospects, and limits to a differentiated consolidation of existing regulations can hardly be analysed without cross-sectoral analyses of governance-related problems, which also has to include empirical research into the parallels and differences between the various types of financial intermediaries. Effectively, the cross-sectoral comparison carried out above thus culminates into a reframed research agenda, and calls for micro-comparisons between the different approaches taken in existing sectoral regulation.

Footnotes:

*  The author would like to thank Guido Ferrarini and Danny Busch for the invitation to contribute to the project. For numerous insightful comments, special thanks are owed to Veerle Colaert and Marije Louisse, who kindly agreed to act as discussants within the working group, as well as to Eddy Wymeersch, Carmine di Noia, and Guido Ferrarini.

1  ‘Report of the Committee on the Financial Aspects of Corporate Governance’, chaired by Sir Adrian Cadbury, London, December 1992, available at http://www.ecgi.org/codes/documents/cadbury.pdf, para 2.5 accessed 28 September 2018. See also, for discussion of this and other definitions in the context of financial institutions, Klaus J Hopt, ‘Better Governance of Financial Institutions’, ECGI Law Working Paper No 207/2013, available at https://ssrn.com/abstract=2212198, 4 accessed 28 September 2018; Klaus J Hopt, ‘Corporate Governance of Banks and Other Financial Institutions After the Financial Crisis’ (2013) Journal of Corporate Law Studies 13, 219, 222; Klaus J Hopt, ‘Corporate Governance of Banks after the Financial Crisis’, in Eddy Wymeersch, Klaus J Hopt, and Guido Ferrarini (eds), Financial Regulation and Supervision—A Post-Crisis Analysis, Oxford University Press, 2012, para 11.01.

2  For a cross-sectoral stock-take, see Section II.

3  See Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC, and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC, OJ L337/35, Article 11(4).

4  Within Europe, see Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds ( … ), OJ L171/1 (hereafter ‘EU Benchmark Regulation’), Articles 4 (‘governance and conflict of interest requirements’), 5 (‘oversight function requirements’), 6 (‘control framework requirements’), 7 (‘accountability framework requirements’). And see, for a general discussion of these and other governance-related provisions in the Regulation, Jens-Hinrich Binder, ‘Organisationsanforderungen an Marktteilnehmer und Marktinfrastruktur’, in C W Canaris, M Habersack, and C Schäfer (eds), Staub. Handelsgesetzbuch, vol. 11/2: Bankvertragsrecht—Investment Banking, DeGruyter, 2018, Part 7, paras 122–134.

5  For specific regulatory requirements addressing FMI in European legislation, see, in particular, Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments ( … ) (MiFID II), OJ L173/349, Articles 45 (‘requirements for the management body of a market operator’), 46 (‘requirements relating to persons exercising significant influence over the management of the regulated market’), 47 (‘organisational requirements for regulated markets’), 48 (‘systems resilience, circuit breakers and electronic trading’); Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (hereafter: EMIR), OJ L201/1, Title IV (‘requirements for CCPs’), Chapter 1 (‘organisational requirements’); Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories (hereafter: CSDR), OJ L257/1, Title III (‘Central Securities Depositories’), Chapter II (‘requirements for CSDs’), Section 1 (‘organisational requirements’).

6  For introductions to the relevant issues, see, e.g. Iris Chiu, ‘Financial Benchmarks: Proposing a Governance Framework Based on Stakeholders and the Public Interest’, Law and Financial Markets Law Review (2015), 9, 223; Iris Chiu, ‘Regulating Benchmarks by “Proprietisation”: A Critical Discussion’, Capital Markets Law Journal (2016), 11, 191 (benchmarks), and Guido Ferrarini, ‘Exchange Governance and Regulation: An Overview’, in Guido Ferrarini (ed), European Securities Markets: The Investment Services Directive and Beyond, Kluwer Law International, 1998, 245; Guido Ferrarini, ‘Stock Exchange Governance in the European Union, in M Balling, E Hennessy, and R O’Brien (eds), Corporate Governance, Financial Markets and Global Convergence, Springer International, 1998, 139; Guido Ferrarini and P Saguato, ‘Governance and Organization of Trading Venues’, in: D Busch and G Ferrarini (eds), Regulation of EU Financial Markets: MiFID II and MiFIR, Oxford University Press, 2017, 285 (on FMI governance). And see (in German), Binder, n 4, paras 141–150.

7  Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, OJ L141/73.

8  In particular, under the BRRD, i.e. Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms ( … ), OJ L173/190. See, e.g. Jens-Hinrich Binder, ‘Resolution Planning and Structural Bank Reform within the Banking Union’, in Juan Castaneda et al (eds), European Banking Union. Prospects and Challenges, Routledge, 2015, 129.

9  See, analysing the historical development of organizational requirements for banks, insurance companies, and investment funds in Europe, Jens-Hinrich Binder, ‘Organisationspflichten und das Finanzdienstleistungs-Unternehmensrecht: Bestandsaufnahme, Probleme, Konsequenzen’, ZGR Zeitschrift für Unternehmens- und Gesellschaftsrecht (2015), 667, 672–701.

10  See further text and nn 25 and 90.

11  The High-Level Group on Financial Supervision in the EU, chaired by Jacques de Larosière, Report, Brussels, 25 February 2009, available at https://ec.europa.eu/info/system/files/de_larosiere_report_en.pdf, accessed 28 September 2018.

12  European Commission, Green Paper: Corporate governance in financial institutions and remuneration policies, COM(2010) 284 final.

13  e.g. BCBS, ‘Guidelines: Corporate Governance Principles for Banks’, July 2015, available at https://www.bis.org/bcbs/publ/d328.pdf, accessed 28 September 2018; Technical Committee of the International Organization of Securities Commissions, ‘Examination of Governance for Collective Investment Schemes – Final Report’, Part I (June 2006), Part II (February 2007); IOSCO, Report on Corporate Governance—Final Report, October 2016.

14  FSB, Principles for Sound Compensation Practices’, 2 April 2009, available at http://www.fsb.org/wp-content/uploads/r_0904b.pdf, accessed 28 September 2018.

15  G20/OECD, Principles of Corporate Governance, 2015, available at http://www.oecd.org/corporate/principles-corporate-governance.htm, accessed 28 September 2018. See also OECD, ‘Corporate Governance and the Financial Crisis: Key Findings and Main Messages’ (2009).

16  OECD, Principles of Corporate Governance, n 15, 9.

17  See n 13, para 4.

18  See n 12, 5.

20  See, for the latest version, FSB, ‘Thematic Review on Corporate Governance. Peer Review Report’, 28 April 2017, available at http://www.fsb.org/2017/04/thematic-review-on-corporate-governance, accessed 28 September 2018.

21  This holds true even for papers that purported to take a broader perspective, e.g. Hopt, n 1.

22  But see, e.g. Eric D Roiter, ‘Disentangling Mutual Fund Governance from Corporate Governance’, Harvard Business Law Review (2016), 6, 1 (discussing fund governance from a US perspective); Houman B Shadab, ‘Hedge Fund Governance’, Stanford Journal of Law, Business & Finance (2013), 19, 141.

23  But see, again, Ferrarini and Saguato, n 6.

24  European Commission, Proposal for a Directive of the European Parliament and of the Council on the prudential supervision of investment firms and amending Directives 2013/36/EU and 2014/65/EU, 20 December 2017, COM(2017) 791 final.

25  For comprehensive reviews of the available evidence and current controversies in recent years, see, e.g. James R. Barth, Chen Lin, and Clas Wihlborg (eds), Research Handbook on International Banking and Governance, Edward Elgar, 2012; Kevin Davis, ‘Bank governance – What do we know, what should we do?’, in David G Mayes and Geoffrey Wood (eds), Reforming the Governance of the Financial Sector, Routledge, 2013, 107; Jakob de Haan and Razvan Vlahu, ‘Corporate Governance of Banks: A Survey’, Journal of Economic Surveys (2016), 30, 228; Guido Ferrarini, ‘Understanding the Role of Corporate Governance in Financial Institutions: A Research Agenda’, in Ondernemingsrecht, 2017, 72; Hopt, n 1; Klaus J Hopt, ‘Corporate Governance von Finanzinstituten – Empirische Befunde, Theorie und Fragen in den Rechts- und Wirtschaftswissenschaften’, ZGR Zeitschrift für Unternehmens- und Gesellschaftsrecht (2017), 438; Peter O Mülbert, ‘Corporate Governance of Banks’, in A Jalilvand and A G Malliaris (eds), Risk Management and Corporate Governance, Routledge, 2014, 242; Peter O Mülbert and Ryan Citlau, ‘The Uncertain Role of Banks’ Corporate Governance in Systemic Risk Regulation’ in Hanne S Birkmose, Mette Neville, and Karsten E Sørensen (eds), The European Financial Market in Transition, Aalphen aan den Rijn: Kluwer, 2012, 275; see also, discussing the relevance for investment firms, Jens-Hinrich Binder, ‘Corporate Governance of Investment Firms under MiFID II’, in Busch and Ferrarini, n 6, 49, para 3.06. And see, for an in-depth analysis of the UK framework for the corporate governance of banks, Andreas Kokkinis, Corporate Law and Financial Instability, Routledge, 2018, 14–39.

26  See, in particular, Veerle Colaert, ‘European Banking, Securities and Insurance Law: Cutting through Sectoral Lines’, Common Market Law Journal (2015), 52, 1579; Veerle Colaert, ‘European Banking, Securities and Insurance Law: Towards a Cross-Sectoral Approach?’, Butterworths Journal of International Banking and Financial Law (2016), 295; Veerle Colaert, ‘Building Blocks of Investor Protection: All-embracing Regulation Tightens its Grip’, Journal of European Consumer and Market Law (2017), 229.

27  This should not be interpreted as a novel hypothesis. See, e.g., discussing the lack of a consolidated set of general rules in European securities regulation in the German tradition of an ‘Allgemeiner Teil’ (‘General rules’ which are then amended and specified for application to more specific circumstances by subsequent parts of a statute), Rüdiger Veil, ‘Europäische Kapitalmarktunion—Verordnungsgesetzgebung, Instrumente der europäischen Marktaufsicht und die Idee eines “Single Rulebook” ’, in ZGR Zeitschrift für Unternehmens- und Gesellschaftsrecht (2014), 544, 576.

28  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, [2013] OJ L176/338 (hereafter CRD IV).

29  As defined by Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, [2013] OJ L176/1 (hereafter CRR), Article (4)(1)(1) (referred to in Article 3(1)(1) CRD IV).

30  i.e. firms engaging in a selected list of regulated investment services, see Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L173/349 (hereafter MiFID II), Article 4(1)(1) and 4(1)(2) in conjunction with Sections A and C of Annex I.

31  BCBS, ‘International Convergence of Capital Management and Capital Standards – A Revised Framework’ (June 2004).

32  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 [2006] OJ L177/1 (the ‘recast Banking Directive’); Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) [2006] OJ L177/201 (the ‘recast Capital Adequacy Directive’).

33  Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC, OJ L386/1.

34  ibid, Article 13(2): ‘sound administrative and accounting procedures and adequate internal control mechanisms’ as prerequisites for licensing of institutions by home authorities.

35  Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field, OJ L141/ 7 (hereafter ‘ISD 1993’).

36  Specifically, see Article (4)(2) in conjunction with Section A of Annex I MiFID II.

37  See, for a more detailed analysis of the rationale and the relevant policy background, Binder, n 25, para 3.12.

38  See n 24.

39  See Binder, n 9, 688.

40  Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145 p. 1 (hereafter ‘MiFID I’).

41  Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, OJ L241/26. See, for further details, Binder, n 25, paras 3.15 and 3.16.

42  Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, OJ L87/1.

43  Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L375/3.

44  See Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (as amended), OJ L302/32, in particular Articles 7(1)(b) (qualification and reputation of management of management company), 7(1)(c) (organizational structure of management company to be disclosed with application for authorization), 7(2) (assessment of ‘close links’ between management company and other natural or legal persons in the authorization process), 8 (assessment of shareholders/members with qualifying holdings), 12 (general organizational requirements for management companies), 14(2) (organizational requirements for implementation of conduct-of-business standards), 14a and 14b (remuneration policies of management companies), 15 (complaints management), 29(1)(b) (qualification and reputation of directors of investment companies), 29(1)(c) (organizational structure of management company to be disclosed with application for authorization), 30 (application of Articles 13–14b to investment companies).

45  Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company, OJ L 176/42.

46  ibid, Recital 1.

47  See Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (as amended), OJ L174/1, in particular Articles 8(1)(c) (qualification and reputation of controlling managers), 8(1)(d) (assessment of shareholders and owners with qualifying holdings), 8(3)(a) (close links with third parties preventing effective supervision), 12 (general operating requirements), 13 (remuneration of directors and managers), 14 (conflicts of interest, including relevant organizational requirements), 15 (risk management), 18 (general organizational requirements).

48  Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision, OJ L83/1.

49  See Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds, OJ L169/8.

50  See Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds, OJ L115/ 1.

51  See Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds, OJ L169/ 8.

52  But note that, in addition to the AIFM regime, specific requirements apply with regard to the management of conflicts of interests by managers of venture capital funds (Regulation (EU) No 345/2015, Article 9) on the one hand and risk management practices in money market funds on the other hand (Regulation (EU) 2017/1131, Chapter III).

53  Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision, OJ L235/10.

54  See Directive 2016/2341/EU of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (hereafter IORP Directive), OJ L 354/37, in particular Articles 10 (operating requirements), 21 (general governance requirements), 22 (reputation and qualification of management), 23 (remuneration policies), 24 (key functions), 25 (risk management), 26 (internal audit).

55  Article 88(2)(a) and Article 91(1) and (10) of CRD IV.

56  Article 45(5) of MiFID II.

57  See, for a detailed analysis, Stefano Finesi, ‘Suitability of Bank Directors in Europe: Just a Matter of Being “Fit & Proper”?’, European Company and Financial Law Review (2015), 45.

58  See, in particular, BCBS, n 13, Principle 2, paras 47–56; see also IOSCO, ‘Report on Corporate Governance—Final Report’, October 2016, 19–22.

59  See, critically, e.g., Luca Enriques and Dirk Zetzsche, ‘Quack Corporate Governance, Round III? Bank Board Regulation Under the New European Capital Requirement Directive’, Theoretical Enquiries in Law (2015), 16, 211, 218–225.

60  See, again, n 25 and accompanying text.

61  Note that this can cause problems only to the extent that the regulated firms actually may, and do, compete with each other, which is not the case, for example, between intermediaries subject to the CRD IV regime (credit institutions and investment firms) on the one hand and asset managers or pension funds on the other hand.

62  cf Article 9(6)(b) of MiFID II; Article 5(4)(3) of UCITS Directive; Article 8(1) of AIFM Directive; and see, for a particularly detailed formulation of the general principle, Article 22(1) of IORP Directive.

63  The author would like to thank Veerle Colaert for making this point.

64  See, in particular, FSB (then FSF), ‘Principles for Sound Compensation Practices’, 2009, available at http://www.fsb.org/wp-content/uploads/r_0904b.pdf, accessed 28 September 2018; FSB, ‘Principles for Sound Compensation Practices: Implementation Standards’, 2009, available at http://www.fsb.org/wp-content/uploads/r_090925c.pdf, accessed 28 September 2018.

65  See n 12, 17–18.

66  And see, generally, Tom Dijkhuizen, ‘The EU’s Regulatory Approach to Banks’ Executive Pay: From Pay Governance to Pay Design’ European Company Law (2014), 11, 30; Eilís Ferran, ‘New Regulation of Remuneration in the Financial Sector in the EU’ European Company and Financial Law Review (2012), 9, 1; Guido Ferrarini and Maria Cristina Ungureanu, ‘An Overview of the Executive Remuneration Issue Across the Crisis’ in Birkmose, Neville, and Sørensen (eds), n 25, 349; Guido Ferrarini and Maria Cristina Ungureanu, ‘Lost in Implementation: The Rise and Value of the FSB Principles for Sound Compensation Practices at Financial Institutions’ Revue Trimestrielle de Droit Financier (2011), 1–2, 60; Andrew Johnston, ‘Preventing the Next Financial Crisis? Regulating Bankers’ Pay in Europe’ Journal of Law and Society (2014), 41, 6; for a US perspective, cf Lucian Bebchuk and Holger Spamann, ‘Regulating Bankers’ Pay’ Georgetown Law Journal (2010), 98, 247.

67  cf Articles 11 and 12 Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC, OJ L386/1.

68  e.g., Iris H-Y Chiu, Regulating (From) the Inside, Bloomsbury, 2015, 87; Grant Kirkpatrick, ‘The Corporate Governance Lessons from the Financial Crisis’, (2009) OECD Journal Financial Market Trends, 6–12. For a comparative review of the different sectors, see, again, Binder, n 9, 680–96.

69  See, in particular, 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) (recast) (as amended) (‘Solvency II’), OJ L335/1, Articles 41(3), 44–47, 236, and 246.

70  Article 6(3) of EU Benchmark Regulation.

71  Articles 26(1) and 28 of EMIR.

72  Article 76(3) and (5) of CRD IV, respectively.

73  See, in particular, Article 76(1) and (2) of CRD IV.

74  See, in particular, Article 123(2) of CRD IV.

75  Article 16(5) of MiFID II and Article 23 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, OJ L87/1.

76  Article 16(5) of MiFID II and Article 24 of Delegated Regulation 2017/565.

77  Articles 21(3) and 24(1)

78  See Articles 41(3) and 47 of Solvency II Directive.

79  See Articles 191, 221(4)(h), 225(3)(d), 288, 361(1)(h), and 104(1) of CRR.

80  See Article 16(2) of MiFID II and Article 22 Delegated Regulation 2017/565.

81  cf again, EU Commission, Green Paper, n 12, in particular 3–4.

82  European Commission, Commission Staff Working Document: ‘Corporate Governance in Financial Institutions: Lessons to be drawn from the current financial crisis, best practices’, SEC(2010) 669 (2 June 2010).

83  See, e.g., Marco Becht, Patrick Bolton, and Ailsa Röell, ‘Why Bank Governance is Different’, Oxford Review of Economic Policy (2011), 3, 437 (discussing both board incompetence and deficient risk management); on the relationship between shareholder-friendly governance structures and risk appetite of intermediaries, see (with mixed results) Deniz Anginer et al, ‘Corporate Governance and Bank Insolvency Risk. International Evidence’, 2014, available at http://ssrn.com/abstract=2491490 accessed 28 September 2018; Andrea Beltratti and René M. Stulz, ‘Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation’, Journal of Financial Economics (2012), 105, 1; David H Erkens, Mingyi Hung, and Pedro P Matos, ‘Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide’, Journal of Corporate Finance (2012), 18, 389; Luc Laeven and Ross Levine, ‘Bank Governance, Regulation and Risk Taking’, Journal of Financial Economics (2009), 93, 259. See also text and n 25.

84  It is worth noting, in this context, that the EU Commission’s Staff Working Document preparing the ground for the 2010 Green Paper, while purporting to discuss governance-related problems of financial institutions generally, expressly focuses on banks and insurance companies, while specific governance issues relating to special types of non-bank institutions are expressly excluded, see EU Commission, n 82, 5.

85  See, e.g., Hopt, in Wymeersch, Hopt, and Ferrarini, n 1, para 11.29; Andreas Kokkinis, ‘A primer on corporate governance in banks and financial institutions: are banks special?’, in Iris Chiu (ed), The Law on Corporate Governance of Banks, Edward Elgar, 2015, paras 1.27–1.28 and 1.56–1.59; see also Mülbert, Corporate Governance of Banks, n 25, 256–7.

86  Roiter, n 22, 14.

87  e.g. Hopt, in Wymeersch, Hopt, and Ferrarini, n 1, para 11.19; Kokkinis, n 85, paras 1.39–1.47; Mülbert, n 25, 249 and 254.

88  Frank Fabozzi, Franco Modigliani, and Frank Jones, Foundations of Financial Markets and Institutions, Pearson, 4th ed, 2014, 24.

89  See Ferrarini, n 25, 73.

90  ibid.

91  ibid, 75. See also, with a focus on risk management and organizational regulation in banks and investment firms, Iris H-Y Chiu, Regulating (From) the Inside. The Legal Framework for Internal Control in Banks and Financial Institutions, Bloomsbury, 2015, 77–119. And see, defining the crucial role of risk management regulation in post-crisis financial regulation within the European Union, EU Commission, Green Paper, n 12, 7.

92  To use the concept framed by Cary Coglianese and David Lazer, see Coglianese and Lazer, ‘Management-Based Regulation Regulation: Prescribing Private Management to Achieve Public Goals’, Law & Society Review (2003), 37, 691.

93  See generally Chiu, n 91, 14–18.

94  EU Commission, Green Paper, n 12, 4.

95  See, e.g., discussing requirements pertaining to the supervisory board under the German Banking Act and the German Stock Corporation Act, Jens-Hinrich Binder, ‘Der Aufsichtsrat von Kreditinstituten drei Jahre nach dem “Regulierungstsunami” ’, ZGR Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018), 88.

96  See, with regard to banks, but in principle applicable across the board, OECD, ‘Corporate Governance and the Financial Crisis: Key Findings and Main Messages’ (June 2009), 12.

97  See, to that effect, Hopt, ‘Corporate Governance of Banks after the Financial Crisis’, n 1, para 11.03.

98  See BCBS, n 13, para 2: ‘The primary objective of corporate governance should be safeguarding stakeholders’ interest in conformity with public interest on a sustainable basis. Among stakeholders, particularly with respect to retail banks, shareholders’ interest would be secondary to depositors’ interest.’

99  See, reaching a similar conclusion, Ferrarini, n 25, 81. And cf, discussing possible strategies for enhancing stakeholder orientation, also Hopt, ‘Corporate Governance of Banks after the Financial Crisis’, n 1. See also, discussing the implications for bank boards’ decisions against incoming demands by supervisory authorities under German banking regulation and company law, Jens-Hinrich Binder, ‘Vorstandshandeln zwischen öffentlichem und Verbandsinteresse’, ZGR Zeitschrift für Unternehmens- und Gesellschaftsrecht (2013), 760.