A Cross-Sectoral Analysis of Corporate Governance Provisions Applicable to Financial Institutions: About Forests and Trees

Abstract

This book chapter compares the governance rules adopted for financial institutions in the various EU instruments. Where the rules differ between financial institutions, we examine whether there are indications that such differences are indeed grounded in a market failure that is not present in other institutions; where the rules are the same, we examine whether this similarity is justified. This approach allows us to identify the possibility and desirability of a cross-sectoral governance regime in the EU. We discuss the corporate governance regimes of banks (CRD IV), investment firms (CRD IV, MiFID II and the new Investment Firms Directive and Investment Firms Regulation), insurance companies (Solvency II), pension funds (Occupational Pension Funds Directive), UCITS management companies (UCITS Directive), and alternative investment fund managers (AIFMD). Moreover, we compare the rules on institutional level 1, level 2 and level 3.

Three conclusions can be drawn from our analysis of the corporate governance provisions across the financial sectors. Firstly, many of the differences between the regimes seem the result of a lack of coordination in adopting the various instruments, rather than of a thorough analysis of diverging identified market failures and their remedies. Secondly, some of the governance mechanisms used are of such a general nature that – even assuming significant differences in governance needs – it can validly be assumed that they would benefit the governance of all types of financial institutions. Thirdly, where differences in the regulatory framework are necessary, these differences can be found as much within sectors as across sectors. The systemic threat posed by different types of asset managers and their funds, eg, varies greatly. However, the existing governance regime focuses on the cross-sectoral divide, rather than on the differences within sectors.

The chapter proposes the idea of European cross-sectoral rules applicable to systemically important financial institutions, ideally via a high-level cross-sectoral directive or regulation based on – eg, as they seem most worked out in adequate detail – the governance rules in CRD IV. We appreciate that there may be a need to distinguish between the different business models and the way they present systemic risk and suggest that this can be achieved through technical implementation measures at level 2 taken by the Commission.

Keywords: Corporate Governance; Financial Institutions; Cross-Sectoral; Banks; Insurance Companies; Investment Firms; Funds