The life of board members of regulated entities, credit institutions and (re)insurance undertakings is fraught with risk. Here a quick high-level reminder of the relevant statutes:
-Subject to matters expressly reserved by law or the Articles of Association to the shareholders, Luxembourg company law entrusts Board of Directors with the widest powers to run the Company with a related liability (which can be joint and several in case of breach of law and Articles of Association) towards the company and third parties (see Articles 441-5 and 441-9 of the Law of 10 August 1915, as amended) and this notwithstanding a delegation of day-to-day management to a managing director or Executive Committee.
-Under Article 70 of the amended law of 7 December 2015 on the insurance sector the Board of Directors of the(re) insurance undertaking is ultimately responsible for the compliance of the undertaking with the legal and regulatory framework.
-Article 9 of CAA Circular 22/15 (“22/15”) published on 26 July 2022 requires that the Board collectively has a level of knowledge, skills and experience commensurate with the complexity of the insurance undertaking and provides a list of competences to wit, insurance markets (life and/or non- life, as the case may be), financial markets, governance, financial analysis, actuarial analysis, risk management and regulatory framework. Collectively, the board of directors shall have an excellent understanding of the activities of the undertaking, related inherent risks, its strategy and the business model.
-The first sentence of Article 11 of CSSSF Circular 12/555, as amended (“12/555”), states that the Board of Directors has overall responsibility for the credit institution. The balance of that Article, as well as Articles 12 to 17, elaborate in fairly good detail what that means in practice in terms of own and supervisory responsibilities. Similarly to the provisions of 22/15 referenced above, Article 19 of 555/12 foresees that the board of directors must collectively have appropriate knowledge, skills and experience with regard to the nature, scale and complexity of the activities and the organization of the institution, as well as the economic and regulatory environment in which the institution operates. In addition to the understanding of the internal governance arrangements and his/her particular area of responsibility, each member shall have a good understanding of the other significant activities of the institution.
To shoulder the workload and responsibilities, Board committees are a welcome adjunct for Board members to lean on. Both 555/12 and 22/15 foresee that the board of directors may or must be assisted by one or more specialized committees who shall have merely an advisory and not a decision-making function. Indeed, the Board may not delegate its responsibilities to the committee(s) it creates (See Article Article 37 of 555/12 and Articles 29 and 39 of 22/15).
-Article 28 of 12/555 enumerates the fields that can be entrusted to those committees (audit, risks, compliance, remuneration and nomination, AML etc ) according to the institution’s needs and considering the nature, scale and complexity of the institution’s activities. Significant institutions (as defined in 12/555) must put in place an audit committee, a risk committee and a nomination and remuneration committee and credit institutions and (re)insurance undertakings that are “public-interest entities” (as defined in the Law of 23 July 2016 concerning the audit profession) put in place an audit committee. Institutions that do not fall into that category may, in accordance with the principle of proportionality, combine different areas of responsibility in one committee (eg audit and compliance). When creating the committees, the board of directors must clearly define their mission, respective area of responsibility, functioning and composition (Article 35 of 12/555; Article 29 of 22/15).
-Regarding the composition of specialized committees, 22/15 goes further than 12/555:
First, the CAA establishes a distinction between “non- executive directors” and “independent directors”. 12/555 refers to non-executives (for instance in Article 31) but provides no definition. The CSSF merely defines “independent directors”* in its Article 23 of 12/555 which refers to the EBA guidelines to appreciate the “independence” of a director.( See Article 9.3 EBA/GL/2021/06 appended to 12/555). Those guidelines, which work a contrario, provide that only the existence of a significant* commercial or financial relationship with the entity or the provision of significant* advisory services to the entity compromise the independence of a director. Article 23 requires on top that this relationship or service provision taint the judgment of the director so as to create a conflict of interest. According to the definitions provided in 22/15, a lawyer sitting on the board of his insurance client may be “non-executive” but is not “independent” but can sit on the board of his banking client as “independent”.
Second, members of specialized committees need not be board members (see Article 29, last paragraph of 22/15). 12/555 foresees that specialized committees can be assisted by external experts who shall not be members (Article 34). Under 12/555, Committee members are thus board members assisted, as the case may be, by internal (eg Heads of key control functions, members of the Authorized Management) and/or external (eg statutory auditor) experts who are not members and do not take part in the recommendations of the committee. (Article 31 of 12/555).
* highlights provided
There is no particular reason to exclude external experts (other than the statutory auditor) from full/voting membership of a Board committee. On the contrary, the Board enhances its level of knowledge, skills and experience by having additional independent experts on its committees. The CAA expressly recognizes this. The CSSF should follow the lead!
ILA’s Committees are a good example of this proposition. True to its mission it has a dual role to play: training of the experts in governance and other areas, matching demand and offer for competent Committee members.