Unit 4 / Section 2 - EU Internal Gov Guidelines

Question 1

What does the EU Capital Requirements Directive (CRD) IV, implemented on 20 June 2018, require of firms?

Answer 1

> Strong and resilient governance, including transparent structures

> Well-defined and clear lines of accountability and responsibility

> Functioning risk identification, management and monitoring processes

> Effective reporting procedures

> Appropriate internal control mechanisms.

Question 2

What 6 elements do the GL11 Guidelines cover?

Answer 2

1) The role and composition of the management body and committees of the firm
2) Transparency and proportionality principles
3) Business continuity management
4) Internal control framework and mechanisms
5) The governance framework (this must include the organisational framework and outsourcing policies)
6) Risk culture and business conduct

Question 3

According to the EU GL11, what are 5 suggested elements of a strong risk culture?

Answer 3

1) Tone from the top management body
2) Monitoring of the risk culture by the management body
3) Accountabilities and responsibilities (at all levels)
4) Effective communications and challenge
5) Incentives are appropriate and drive the correct behaviours

Question 4

How can high ethical, cultural and professional standards be achieved?

Answer 4

1) Policies to remind employees that the firm’s activities must comply with legislation, regulation and corporate values.
2) Enhancing risk awareness by linking the need for a strong risk and compliance culture with the expectation that risk appetite and tolerance will not be exceeded by operational activities.
3) Examples of acceptable and unacceptable conduct.
4) Articulating the expectations that employees are expected to conduct themselves with honesty and integrity, and exercise due skill, care and diligence – in addition to complying with legal and regulatory expectations.
5) Ensuring employees are aware of the consequences of misconduct and unacceptable behaviours.

Question 5

What are 6 potential areas where conflicts of interest may arise?

Answer 5

• Economic interests – shareholdings and loans, as examples
• Personal or professional relationships with the owners of a firm
• Personal or professional relationships with other employees of the firm – such as family relationships
• Other current or previous employment
• Personal or professional relationships with external stakeholders – like suppliers or consultants
• Political influence or relationships

Question 6

What are 5 mitigating measures to reduce the conduct risks associated with conflicts of interest?

Answer 6

1) Transferring the conflicting activities to other employees
2) Preventing employees with outside interests from having inappropriate influence within the firm on related activities
3) Ensuring senior employees cannot vote on issues where a conflict of interest could undermine their ability to be impartial
4) Processes to manage transactions with connected third parties, where conflicts of interest may exist
5) Preventing board members from holding similar positions in competitors, or in linked firms, unless adequate control mechanisms are in place