Finance Law :- Relevant Provisions of the CBN Guidelines on Corporate Governance For Commercial/Merchant Non-Interest Payment Service Banks and Finance Holding Companies – External Auditors & Shareholders
This chapter of the CBN Corporate Governance article series will be focused on the provisions of the CBN Guidelines on external auditors, general meetings and shareholders.
External Auditors
– The appointment and removal of the external auditor shall be the responsibility of the board, subject to the approval of the Central Bank of Nigeria (CBN).
– The external auditor shall report annually in the financial statements, the extent of the bank’s compliance with the provisions of Nigerian Code of Corporate Governance (NCCG) 2018 and the CBN Guidelines.
– The external auditors shall render annual reports to the Director, Banking Supervision Department (BSD) on the bank’s risk management practices, Internal controls and level of compliance with regulatory directions.
– The report stated in S.18.3 of the guidelines shall in the case of an Non-Interest Bank (NIB) , include an assessment of the process of identification and disposal of NPI(Non-Permissible Income), the treatment of PSIAHs and income smoothing (if any).
– In addition to the requirement this section, the external auditors of an NIB shall review the :-
a). Compliance of the bank with the decisions of the ACE & FRACE.
b). Work of the ISA & ISCO.
– The external auditor shall forward copies of the report together with Its management letter on the bank’s audited financial statements, to the Director, Banking Supervision Department, latest March 31st following the end of every accounting year.
– Banks are required to publish their annual audited financial statements in 2 National daily newspapers and on their websites.
– External auditors of banks shall not provide client services that could amount to conflict of interest, including the following :-
a). Book-keeping or other services related to the accounting records or financial statements of the audit client.
b). Valuation services, Business opinion or contribution-in-kind reports.
c). Actuarial services.
d). Internal audit outsourcing services.
e). Management or human resource functions including broker or dealer services, investment banking services and legal or expert services
f). Board evaluation & appraisal services.
g). IT & system audit.
h). Software sales, consulting and management.
– Where the CBN is satisfied that an external auditor of a bank has engaged in any unethical practice or illegal activity, the CBN shall request the board of the bank to remove the external auditors, or it may impose any other sanction on the bank in line with the provisions of extant laws and regulations.
General Meetings
– The board shall ensure that the venue of a general meeting is convenient and easily accessible to the majority of shareholders.
– The board may consider rotating the venue of general meetings where it promotes better access to the majority of shareholders.
– Banks may hold their general meetings virtually where physical meetings are not feasible.
What are the provisions of the CBN Guidelines regarding shareholders?
Shareholders Engagement
– The board of a bank with institutional investors shall ensure that such investments carry out the responsibilities details in Recommended Practice 22.3 of NCCG 2018.
– The board shall ensure that dealings of publicly listed banks with shareholders’ associations are in strict adherence with the code of conduct for shareholders’ associations issued by the Securities and Exchange Commission (SEC).
– Where a bank is not publicly quoted, its dealings with shareholders shall be transparent and in line with best practices.
Protection of Shareholders’ Rights
– Except where prior CBN approval is granted, no individual, group of individuals, their proxies or corporate entities shall own controlling interest in more than one bank.
– The CBN’s prior approval and no objection shall be sought and obtained before any acquisition of shares of a bank (including through the capital market) that would result in equity holding it 5% and above by any investor.
– Where the CBN has an objection on any acquisition as stated above, notice of the objection shall be communicated to the bank and the bank shall notify such investors within 48 hours.
– Government’s direct and indirect equity holding in a bank shall not be more than 10% which shall be divested to private investors within a maximum period of 5 years from the date of investment
– For existing investments above 5 years, the bank shall within 2 years from the effective date of the guidelines comply with the provisions mentioned above.
Relevant Provisions of The CBN Guidelines on Corporate Governance For Commercial/Merchant Non-Interest Payment Service Banks and Financial Holding Companies – Business Conduct & Ethics, Related Party Transactions, Conflicts of Interest, Sustainability, and Stakeholder Communication.
This chapter in the CBN Corporate Governance series will be focused on the provisions of the Central Bank of Nigeria Corporate Governance Guidelines on business conduct & ethics, related party transactions, conflicts of interest, sustainability and stakeholder communication.
Business Conduct & Ethics
– Banks shall establish a code of business conduct and disclose in the code, such information & practices necessary to maintain confidence in the bank’s integrity.
– The code referenced in S. 21.1 shall take into account the legal obligations and reasonable expectations of the bank’s shareholders, as well as the responsibility and accountability of individuals reporting on issues or unethical practices.
– The code so mentioned in this provisions is to be renewed at least once every 3 years.
What are the provisions of the guidelines concerning related party transactions?
– Banks shall establish a policy concerning insider trading and related payment transactions by directors, senior executives and employees as well as publishing the policy or a summary of that policy on their website.
– The policy shall contain appropriate standards and procedures to ensure it is effectively implemented.
– In addition to the requirements above, there shall be an internal review mechanism carried out by the internal audit function of the bank, to assess the compliance and effectiveness of the policy.
– Any director whose facility or that of his related interests remains non-performing in any Financial Institution (FI) for more than 1 year shall cease to be on the board of the bank and shall be blacklisted from sitting on the board of such bank and that of any other FI under the purview of the CBN.
– No director-related loans and/or interest shall be written off without the CBN’s prior approval.
– In the case of a Payment Service Bank (PSB) :-
a). Where a PSB is a related company to an existing infrastructure provider which provides services to other FIs, the PSB shall ensure that its dealings with the infrastructure provider is at arms-length.
b). The following conditions shall guide business conduct between PSBs , their parent companies and other related entities (where applicable) :-
– A parent company or any other related entity of a PSB, which renders services to the PSB may extend similar services to other entities that so desire on the same terms and conditions.
– A parent company or any other related entity of a PSB is prohibited from giving any preferential treatment to the PSB.
– Preferential treatment by a parent company or any other related entity shall, among others, include :-
a). Precluding its subsidiary’s competitor from using its infrastructure or services.
b). Offering lower quality of service to its subsidiary’s competitors.
c). Offering such infrastructure or services at differential pricing levels.
– Failure of any PSB to abide by these fair competition clauses may lead to revocation of its license.
– All services between the parent company and its PSB shall be guided by SLAs and/or shared services arrangements in line with the CBN Guidelines For Shared Services Arrangements for Banks and Other Financial Institutions (OFIs).
– A PSB shall submit the SLAs mentioned above to the CBN for prior approval before implementation.
What are the provisions of the guidelines on conflicts of interest?
– Banks shall develop and adopt a policy to guide the board and individual directors in conflict of interest situations, which shall cover the following areas :-
a). Approval & revision date
b). Definition of conflict of interest
c). Purpose of the policy
d). Procedures to follow and situations of conflict of interest.
– The board shall be responsible for managing conflicts of interest of directors and senior management in a bank.
– Any concern raised by a director on the activities of his/her Financial Holding Company (FHC) shall be recorded in the minutes of the board/board committee meetings.
What are the provisions of the guidelines on sustainability?
The guidelines provide that banks shall comply with the provisions of Recommended Practice 26 of the Nigerian Code of Corporate Governance (NCCG) 2018 as well as the requirements of the Nigerian Sustainable Banking Principles.
What are the provisions of the guidelines on stakeholder communication?
– In addition to the traditional means of communication, banks shall have a website and are encouraged to communicate with stakeholders via the website and other official channels.
– The board shall develop stakeholder communication policies and post same on the bank’s website.
– The board shall ensure that stakeholders have the freedom to communicate their concerns on illegal or unethical practices to the board. Where the concerns relate to the activities of the board, such individuals may present a complaint to the CBN.
Relevant Provisions of the 2023 CBN Guidelines on Corporate Governance for Commercial/Merchant Non-Interest Payment Service Banks and Financial Holding Companies – Disclosures, Returns and Sanctions.
In this article being the final chapter of the Corporate Governance series, the focus will be on the provisions of the CBN Guidelines on Corporate Governance For Commercial/Merchant/ Non-Interest Banks (CMNIBs), Payment Service Banks (PSBs) and Financial Holding Companies regarding :-
– Disclosures
– Returns
– Sanctions
Disclosures
– Disclosure in the annual report shall include but not limited to, material information on :-
a) Directors, including –
– Remuneration policy for members of the board and executives
– Total remuneration of Non-Executive Directors (NEDs), including fees and allowances
– Total executive compensation, including bonuses paid/payable
– Details and reasons for share buybacks, if any, during the period under review
– Board of Directors performance evaluation
– Shares held by directors and their related parties
– Details of directors, shareholders and their related parties who own 5% and above of the bank’s shares as well as other beneficial owners who in concert with others, control the bank.
b). Corporate Governance Structure
– Appointment and tenure of directors
– Composition of board committees including names of the chairman and members of each committee.
– Total number of board and its committees meetings held in the financial year and attendance by each director.
– A summary of details or training and induction for directors.
– For Non-Interest Banks (NIBs):-
a). Shari’a governance mechanisms
b). A statement on compliance with internal shari’a review mechanism
c). Composition of the ACE and the number of meetings attended by each member
d). ACE certification of compliance with principles of Islamic Finance
c) Risk Management :- which includes-
– All significant risks including risks specific to NIBs
– Risk management practices indicating the board’s responsibility for the entire process of risk management as well as a summary of the lapses to be observed by external auditors, if any
– Information on strategic modification to the core business of the bank
– All regulatory/supervisory contraventions, sanctions and penalties during the year under review and infractions through whistle blowing
– Capital Structure/Adequacy
– Opening and closing of branches/outlets
– Any service contract and other contractual relationships with related parties
– Frauds and forgeries
– Contingency planning framework
– Contingent assets and liabilities (off-balance sheet items))
– The details of parent/holding institutions, subsidiaries, affiliates, Joint Ventures (JVs) and Special Purpose Vehicles (SPVs) where applicable
– Any matter not specifically mentioned in this guidelines, but which may materially affect the financial position or going concern status of the bank
– NIBs in addition to all the above shall make disclosures on :-
a). Returns paid to PSIAHs and amount of income smoothing (if any)
b). Non-Permissible Income if any and its disposal
– To foster good corporate governance, banks are encouraged to make robust disclosures beyond the statutory requirements contained in the Banks and Other Financial Institutions Act (BOFIA) 2020 and other applicable laws and regulations
– Annual reports of NIBs are required to contain certification of the ACE that the operations of the NIB are in line with the principles of Islamic Finance
What are the provisions of the CBN Guidelines concerning returns?
– Banks shall submit to the Director, Banking Supervision Department, CBN, periodic returns as specified in the extant guidelines for licensing and regulation of Financial Holding Companies in Nigeria.
– When required, every bank shall render electronic submission of each of these regulatory returns to a dedicated web portal as may be prescribed by the Financial Reporting Council (FRC).
What are the provisions of the guidelines on sanctions?
-The failure of a bank to comply with any of the requirements under the guidelines and the Recommended Practices in the Nigerian Code of Corporate Governance (NCCG) 2018, constitutes a regulatory breach and shall attract a penalty as may be prescribed by the CBN.
The rendition of false, misleading and/or incomplete information to the CBN shall attract appropriate sanctions including monetary penalties and administrative sanctions on the individual and the bank.
– A breach of any of the provisions of this Guidelines by a director, manager or officer shall attract appropriate sanctions including monetary penalties and administrative sanctions on the individual responsible for the breach.
-In addition to the provision of Section 28.3, such director, manager or officer of the bank shall be suspended for six months in the first instance and possible removal from the Board of the bank in the event of continued reoccurrence of the breach.
