Insurance regulatory update: update of the Overarching Circular on Governance
On 5 May 2020, the National Bank of Belgium (“NBB”) published its second updateof Circular NBB_2016_31 on Belgium’s prudential expectations concerning the governance system in the insurance and reinsurance sector (hereafter “Overarching Governance Circular”).
The Overarching Governance Circular applies to:
- insurance and reinsurance undertakings governed by Belgian law, except for small and local insurance undertakings;
- branches of third-country insurance undertakings carrying out activities of insurance in Belgium; and
- entities responsible for an insurance or reinsurance group or for a financial conglomerate governed by Belgian law.
The main changes from the previous version of the Overarching Governance Circular relate to the following aspects:
- entry into force of the new Code of Companies and Associations (“CCA”);
- simplification of the rules on the distribution of tasks between the members of the Management Committee;
- clarification of the rules on outsourcing;
- reinforcement of rules regarding remuneration;
- strengthening of the rules on IT infrastructure;
- introduction of the first recommendations on sustainable finance; and
- further development of the principle of proportionality.
Except for the recommendations and expectations on outsourcing and variable remuneration, the changes to the Overarching Governance Circular enter into force immediately. The recommendations regarding outsourcing enter into force on 1 January 2021 and the expectations on variable remuneration apply to variable remunerations paid in 2021 for 2020.
In this e-zine, we discuss selected topics of these important changes.
1. Changes following the entry into force of the Code of Companies and Associations (“CCA”)
The NBB indicates that it has revised some of its expectations to integrate the new rules of the CCA. These changes aim to reconcile the rules of the CCA with prudential requirements regarding the decision-making framework, such as the management structure, independence criteria, expectations with regard to the social status of directors and the members of the Management Committee, conflicts of interests etc. In some instances, these requirements derogate from the management model of a conventional company and require particular attention.
The NBB emphasises that, pursuant to the CCA, a director or a member of the Management Committee of an insurance or reinsurance undertaking cannot carry out its activities under an employment contract. In case of breach, the NBB expects regulated entities to remedy the situation.
Furthermore, the NBB explicitly considers that “the combination of two statuses (the status of self-employed as director or member of the management committee and the status of employee in a relationship of subordination for another technical or administrative service function) within the same company is not reconcilable with the principles of sound governance applicable to insurance and reinsurance companies”. It requests to terminate such combinations, if currently present.
The updated Overarching Governance Circular maintains the two-tier management structure of the insurance or reinsurance undertaking, where certain competences are assigned to the Management Committee and the composition of both decision-making bodies partially overlap.
The NBB indicates that the CCA is not clear on the requirements for independent directors. As a transitional measure, the NBB expects these directors to continue to comply with the nine criteria from Article 526ter of the old Companies Code, even though this Code no longer applies.
2. Simplification of the rules on the distribution of tasks between the members of the Management Committee
Chapter 1 of the Overarching Governance Circular sets out the expectations with regard to the distribution of tasks between the members of the Management Committee. The Circular now provides an indicative standard scheme.
3. Clarification of the rules on outsourcing
The NBB amends the detailed recommendations with regard to outsourcing on different aspects, in particular with regard to the outsourcing of critical or important functions or activities. The main changes to Chapter 7 of the Overarching Governance Circular are:
- governance of the outsourcing process for a critical or important function or activity taking into account the different stages of the outsourcing cycle, in particular (i) the pre-contractual stage (monitoring conditions, due diligence of the service provider and performance of a risk assessment), (ii) the contractual stage (content of the outsourcing agreement), (iii) the post-contractual stage (outsourcing monitoring System and exit strategy);
- clarification of the NBB’s expectations with regard to intra-group outsourcing;
- strengthening of the requirements for outsourcing of critical or important functions or activities to countries outside the European Economic Area, such as the United Kingdom after the entry into force of Brexit;
- the specification of the outsourcing monitoring tasks assigned to the compliance and internal audit functions. The Bank now expects files for the notification of critical or important outsourcings to include an opinion of the persons responsible for the compliance function certifying compliance with the governance requirements pertaining to outsourcing.
- clarification of the Bank's expectations for documentation and reporting. A template for notifying the Bank of a critical or important outsourcing has been added as Annex 4 to the Overarching Governance Circular and Annex 5 now comprises the standard opinion to be filled in by the person responsible for the compliance function.
Regulated entities must comply with the new recommendations for outsourcing as of 1 January 2021.
4. Reinforcement of the rules on remuneration
In line with EIOPA’s Opinion of 7 April 2020 to ensure a better convergence between supervisors with regard to the supervision of remuneration rules, the NBB has amended its expectation with regard to remunerations.
It reinforces the rules on remuneration for so-called “Identified Staff” receiving a significant variable remuneration, i.e. persons who receive a variable remuneration exceeding 50.000 EUR and representing more than a third of their total annual remuneration.
In particular, Chapter 8 of the Overarching Governance Circular contains new supplementary rules related to:
- reference ratio for the balance between fixed and variable remuneration;
- interpretation of the notion of “Deferral of a substantial portion of the variable remuneration”;
- the use of financial and non-financial parameters for the assessment of the individual performance of Identified Staff;
- clear descriptions in the remuneration policy regarding the use of downward adjustments and termination payments
- limited amendments to the template for reporting figures (Annex 3 of the Overarching Governance Circular”.
The new recommendations on remuneration apply for the variable remunerations paid in 2021 for 2020. Regulated entities must first use the amended template for reporting figures for the reporting to be submitted in April 2021.
 This Opinion is available here.
5. Strengthening of the rules on IT infrastructure
Chapter 10 of the Overarching Governance Circular, setting out requirements for IT infrastructure, is revised as follows:
- additions of an explicit reference to cyber security in Section 10.1. "IT security", and
- extension of the scope of Communication NBB_2015_32 on continuity to all significant companies.
Furthermore, the NBB refers explicitly to the new Circular NBB_2020_18¬ on cloud outsourcing, published on the same day as the Overarching Governance Circular and implementing EIOPA’s guidelines of 6 February 2020.
 This communication is available here.
6. First recommendations on sustainable finance
The Overarching Governance Circular contains new recommendations with regard to sustainable finance, in line with EIOPA’s current work with regard to Environmental, Social and Governance (“ESG”) factors.
In particular, the Overarching Governance Circular now provides for recommendation with regard to the management structure (training), the independent control functions (risk management), financial management and remuneration.
7. Principle of proportionality
Throughout the Overarching Governance Circular, the NBB provides for exemptions and derogations for “less significant” insurance or reinsurance undertakings, being undertakings qualified as such by the NBB based on the nature, scope and complexity of their risks and activities.