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Bank Governance and Risk Management in Luxembourg: A Closer Look
In an effort to ensure effective oversight of daily bank management, the Commission de Surveillance du Secteur Financier (CSSF) has implemented a range of requirements for banks operating in Luxembourg. At the heart of these regulations is the prohibition against combining the roles of chair of the management body and chief executive officer.
Composition of the Management Body
The CSSF places great emphasis on the composition of the management body, requiring that it be composed of at least three members who are independent of the bank’s day-to-day operations. Additionally, at least one member must have relevant experience in banking or financial activities.
Risk Management
Luxembourg banks must also establish a robust risk management framework to identify, assess, and mitigate potential risks. This includes taking into account new or expanded product offerings when assessing risks.
Internal Audit Function
The CSSF requires each bank to establish an internal audit function, which is responsible for reviewing and assessing the central administration and internal governance arrangements of the credit institution. The internal audit function must be:
- Permanent
- Independent
- Objective
- With sufficient authority to express itself freely and access all relevant external and internal data
External Audit
Credit institutions in Luxembourg must have their annual accounts audited by one or more approved statutory auditors. Any change in the approved statutory auditor must be authorized in advance by the CSSF.
Additional Requirements
CSSF Circular 12/552 contains additional details on the organization and responsibilities of the internal control functions, including the internal audit function, and the way in which they must execute their work. Smaller credit institutions with a low risk profile may outsource their internal audit function, subject to an assessment by the CSSF.
Conclusion
The CSSF’s regulations aim to ensure that banks operating in Luxembourg maintain high standards of governance and risk management. By understanding these requirements, banks can better navigate the complexities of operating in this jurisdiction and minimize potential risks.
For further information on bank governance and risk management in Luxembourg, please contact Michael Schweiger or Adrien Pierre at [insert contact information].