Banking Governance: A Key Component of Sound Management

The Bank of Italy (BoI) has introduced new regulations aimed at strengthening banking governance and ensuring the stability and resilience of the financial system. At the heart of these reforms is the requirement for banks to establish a robust internal control environment that promotes sound and prudent management.

Independent Members Key to Supervisory Body

In its Provision of August 1, 2023, the BoI has stipulated that banks must appoint at least one independent member to their supervisory body. This move is designed to ensure that the interests of all stakeholders are represented and protected.

The appointment of an independent member will promote transparency and accountability in bank decision-making.
It will also help to prevent conflicts of interest and ensure that the interests of shareholders, customers, and employees are taken into account.

AML Compliance: A New Era of Transparency

As part of its efforts to combat money laundering and terrorist financing, the BoI has introduced new rules requiring banks to appoint a member responsible for Anti-Money Laundering (AML) purposes. This individual must possess adequate knowledge and experience in AML matters.

Banks will need to ensure that their AML compliance function is separate from their risk management function.
The appointed AML officer will be responsible for monitoring and reporting on AML risks, as well as developing and implementing AML policies and procedures.

Interlocking Directorates Prohibited

To prevent conflicts of interest and promote good governance, the BoI has prohibited interlocking directorates in the banking, finance, and insurance sectors. Under Decree 201/2011, individuals appointed to key positions cannot hold similar roles in competing companies or groups.

This prohibition will help to prevent insider trading and other forms of financial misconduct.
It will also promote greater transparency and accountability in bank decision-making.

Internal Committees: A Key Tool for Decision-Making

Larger banks and financial institutions must establish specialized committees, composed of at least three non-executive and independent members, to facilitate decision-making and mitigate risk. These committees will focus on “appointments,” “risk,” and “remuneration” matters.

The establishment of these committees will promote greater transparency and accountability in bank decision-making.
They will also help to ensure that key decisions are made with a clear understanding of the risks involved.

Remuneration Policies: A Focus on Long-Term Value

Banks are required to adopt sound remuneration policies that align with their long-term business values and objectives. Remuneration systems must be transparent, consistent with risk appetite frameworks, and designed to avoid incentives that could lead to regulatory violations or excessive risk-taking.

Banks will need to ensure that their remuneration policies are aligned with their overall business strategy.
They will also need to monitor and review their remuneration policies regularly to ensure they remain effective and compliant with regulations.

Internal Control Environment: A Pillar of Banking Governance

The BoI has emphasized the importance of a robust internal control environment in ensuring the consistency of bank activity with its strategies and policies. Banks must establish permanent and independent internal control functions, including compliance, risk management, and internal audit functions.

A robust internal control environment will help to prevent financial misconduct and ensure that banks are operating in a transparent and accountable manner.
It will also promote greater trust and confidence between banks and their stakeholders.

By implementing these reforms, banks can strengthen their governance frameworks, reduce risk, and promote stability in the financial system. As the banking sector continues to evolve, it is essential that institutions prioritize good governance and transparency to maintain public trust and confidence.