Corporate Governance in Financial Companies: Regulation as a Catalyst for Institutional Maturity

Corporate Governance in Financial Companies: Regulation as a Catalyst for Institutional Maturity

Regulation often begins as a technical exercise - an assemblage of requirements, compliance obligations, and procedural mandates. But over time, it becomes something more: a reflection of systemic priorities, a blueprint for institutional behavior, and, ultimately, a force shaping market culture. Such is the case with Regulation No. 185, issued by the National Bank of Ukraine (NBU) in late 2024, which elevates corporate governance standards for financial institutions.

At its core, the regulation does more than impose stringent internal controls, risk management protocols, and compliance structures; it challenges financial institutions to rethink governance as a strategic function rather than a bureaucratic necessity. The mandate applies to all financial entities engaged in lending, factoring, leasing, and other financial services, compelling them to embrace governance frameworks that mirror European and global best practices in response to increasing regulatory complexity.

One of the most consequential aspects of Regulation No. 185 is its insistence on the "Three Lines of Defense" model, a structured approach that delineates responsibility for operational risk, compliance oversight, and independent internal audit. This framework is not just a regulatory expectation; it is an architectural shift in corporate responsibility, reinforcing accountability at every level of financial decision-making. In addition to establishing clear governance policies, firms must define risk appetite statements, conflict-of-interest mitigation strategies, and internal control systems that align with international standards, such as the European Banking Authority’s (EBA) guidelines on internal governance and the Basel Committee’s governance principles.

The Challenge of Compliance: A Transitional Reckoning

The regulatory transition period, which extends until April 30, 2025, presents financial institutions with a complex challenge: adapting governance structures in real time while maintaining operational continuity. This process demands more than a surface-level compliance audit - it requires a fundamental reassessment of how governance functions in an era of heightened regulatory scrutiny.

Failure to comply is not merely an administrative inconvenience; it carries significant financial and operational consequences, including regulatory fines, restrictions on business activities, and, in severe cases, license revocation. The stakes are clear: institutions must proactively allocate resources, foster a culture of compliance, and leverage digital solutions to meet regulatory expectations. Advanced technologies - AI-driven risk assessment, real-time transaction monitoring, and automated compliance reporting systems - are no longer optional enhancements but essential tools for governance integrity.

Yet, beyond the technical challenges, there is a more profound question at play: Is governance merely a safeguard against regulatory penalties, or can it serve as a foundation for long-term competitive advantage?

Governance as a Competitive Edge: The Strategic Imperative

The NBU’s governance reforms are not occurring in isolation. They are part of a broader alignment with European financial integration efforts, reflecting a global trend toward risk-based supervision, corporate accountability, and regulatory transparency. The Financial Stability Board (FSB) underscores that sound governance is integral to financial stability, while the International Monetary Fund (IMF) has emphasized the importance of adaptable governance frameworks in emerging markets. Moreover, the European Commission’s Corporate Sustainability Reporting Directive (CSRD) highlights the growing intersection of financial governance with ESG (environmental, social, and governance) considerations - a reality that forward-thinking institutions cannot afford to ignore.

In this evolving landscape, corporate governance is no longer just about compliance - it is about institutional credibility, market positioning, and long-term resilience. Financial institutions that approach governance as an opportunity rather than an obligation will emerge as industry leaders. By embedding governance reforms into strategic decision-making, leveraging digital governance ecosystems, and engaging proactively with regulators, firms can mitigate regulatory risks while enhancing their institutional reputation and market standing.

The ultimate question is not whether financial institutions can meet the requirements of Regulation No. 185, but rather how they will interpret and integrate governance into their corporate ethos. Those that recognize governance as an instrument of trust, rather than a burden of compliance, will not only navigate regulatory complexities with confidence but also position themselves at the forefront of an evolving financial landscape.

References:

1. Basel Committee on Banking Supervision. Corporate Governance Principles for Banks
2. European Banking Authority. Guidelines on Internal Governance
3. Financial Stability Board. Principles for Sound Compensation Practices
4. International Monetary Fund. Governance and Risk Management in Emerging Markets
5. National Bank of Ukraine. Regulation No. 185 on Corporate Governance and Internal Control Systems

Author: Andrii Kotyk