1 Role and responsibilities of the management body

The management body must have ultimate and overall responsibility for the investment firm and defines, oversees and is accountable for the implementation of the governance arrangements as referred to in particular under Articles 26, 28 and 29 of Directive (EU) 2019/2034, within the investment firm that ensure the effective and prudent management of the investment firm.

The duties of the management body should be clearly defined, distinguishing between the duties of the management (executive) function and of the supervisory (non-executive) function. The responsibilities and duties of the management body should be described in a written document and duly approved by the management body. All members of the management body should be fully aware of the structure and responsibilities of the management body, and of the division of tasks between different functions of the management body and its committees, where appropriate.

The management body in its supervisory function and its management function should interact effectively. Both functions should provide each other with sufficient information to allow them to perform their respective roles. In order to have appropriate checks and balances in place, decision-making within the management body should not be dominated by a single member or a small subset of its members.

Without prejudice to the tasks and responsibilities assigned to the management body under Directive (EU) 2014/65, the management body ’s responsibilities should include setting, approving and overseeing the implementation of:

• a. the overall business strategy and the key policies of the investment firm within the applicable legal and regulatory framework, taking into account the investment firm ’ s long-term financial interests and solvency;
• b. the overall risk strategy, including the investment firm ’s risk appetite and its risk management framework, including adequate policies and procedures, taking into account the macroeconomic environment and the business cycle of the investment firm and measures to ensure that the management body devotes sufficient time to risk management issues; an adequate and effective internal governance and internal control framework that includes a clear organisational structure and well-functioning internal control mechanisms. Such mechanisms should include a permanent and effective compliance function and, where appropriate and proportionate in accordance with Title I, internal risk management and internal audit functions that have sufficient authority, stature and resources to perform their functions independently, and ensure compliance with applicable regulatory requirements in the context of the prevention of money laundering and terrorism financing; and also targets for the liquidity management of the investment firm;
• c. a remuneration policy that is in line with the remuneration principles set out in Articles 26 and 30 to 33 of Directive (EU) 2019/2034 and the EBA guidelines on sound remuneration policies under Directive (EU) 2019/2034¹³ ;
• d. arrangements that aim to ensure that the individual and collective suitability assessments of the management body are carried out effectively, that the composition and succession planning of the management body are appropriate, and that the management body performs its functions effectively¹⁴ ;
• e. a selection and suitability assessment process for key function holders¹⁵ ;
• f. arrangements that aim to ensure the internal functioning of each committee of the management body, where established, detailing the:

• g. a risk culture in line with Section 8 of these guidelines that addresses the investment firm ’s risk awareness and risk -taking behaviour;
• h. a corporate culture and values in line with Section 9 that foster responsible and ethical behaviour, including a code of conduct or similar instrument;
• i. a conflict of interest policy at the investment firm level in line with Section 10; and for staff in line with Section 11; and
• j. arrangements that aim to ensure the integrity of the accounting and financial reporting systems, including financial and operational controls and compliance with the law and relevant standards.

¹³ EBA guidelines on sound remuneration policies under the IFD

¹⁴ See also the joint ESMA and EBA guidelines on the assessment of the suitability of members of the management body and key function holders.

¹⁵ See also the joint ESMA and EBA guidelines on the assessment of the suitability of members of the management body and key function holders.

When setting up, approving and overseeing the implementation of the aspects listed in paragraph 25, the management body should aim to ensure a business model and governance arrangements – including a risk management framework – that take into account the risks investment firms are or might be exposed to or the risks that they pose or might pose to others¹⁶ . When taking into account all risks, investment firms should take into account all relevant risk factors, including environmental, social and governance risks factors. Investment firms should consider that the latter may drive their prudential risks¹⁷ . Such ESG risk factors include, e.g. legal risks in the area of contractual or labour law, risks relating to potential human rights violations or other ESG risk factors that may affect the country where a service provider is located and its ability to provide the agreed service levels.

¹⁶ See Article 26 of Directive (EU) 2019/2034.

¹⁷ See EBA discussion paper on ESG risk management and supervision published under the CRD Art. 98(8) for a description of the EBA’s understanding of ESG risks, transmission channels and recommendations for arrangements, processes, mechanisms and strategies to be implemented by institutions to identify, assess and manage ESG risks.

The management body should oversee the process of disclosure and communications with external stakeholders and competent authorities.

All members of the management body should be informed about the overall activity, financial and risk situation of the investment firm, taking into account the economic environment, and also about any decisions taken that have a major impact on the investment firm ’s business.

A member of the management body may be responsible for an internal control function as referred to in Title V, Section 18.1, provided that the member does not have other mandates that would compromise the member ’ s internal control activities and the independence of the internal control function.

The management body should monitor, periodically review and address any weaknesses identified regarding the implementation of processes, strategies and policies relating to the responsibilities listed in paragraphs 25 and 26. The internal governance framework and its implementation should be reviewed and updated on a periodic basis, taking into account the proportionality principle, as further explained in Title I. A deeper review should be carried out where material changes affect the investment firm.

Where investment firms are legal persons managed by a single natural person in accordance with their constitutive rules and national laws, the references in these guidelines to a management body should be construed as applying to the single person that is responsible for implementing alternative arrangements to ensure the sound and prudent management of such an investment firm and the adequate consideration of internal governance arrangements.