CBN proposes stricter separation between banks, subsidiaries to protect customer funds

THE Central Bank of Nigeria (CBN) has unveiled a draft framework aimed at creating a clear separation between banks and other financial entities under the same ownership, including financial technology (fintech) firms. The move is designed to ensure that such subsidiaries operate independently and reduce risks arising from interconnected operations.

The proposal, contained in a circular dated June 10 entitled ‘Exposure of the Draft Guidelines on Ring-Fencing Operations of Closely Linked Entities in the Nigerian Financial System,’ also seeks to prevent customer funds from being used to support affiliated companies.

According to the apex bank, the framework is intended to establish operational and functional boundaries among related entities while addressing regulatory loopholes created when institutions operating under different licences mix activities.

The draft guidelines cover governance arrangements, intra-group transactions, customer fund and data segregation, operational independence, recovery and resolution planning, as well as consolidated supervision.

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CBN said the measures are aimed at strengthening consumer protection, promoting transparency and accountability, reducing contagion risks among related firms, and safeguarding financial system stability while encouraging innovation and fair competition.

The regulator defined a closely linked entity as any organisation that directly or indirectly controls, is controlled by, or shares common control with another entity through ownership structures, voting rights, overlapping directors or management, shared systems and branding, or contractual dependencies.

Under the proposal, each closely linked entity would be required to maintain separate governance and risk management frameworks and independently meet capital adequacy and liquidity requirements, regardless of the resources available within the wider group.

The CBN also proposed tighter oversight of transactions between related companies. It said no closely linked entity would be allowed to grant loans to, or guarantee the obligations of, another related entity without obtaining prior written approval from the regulator. Such transactions must be conducted at arm’s length and reported to the CBN every quarter.

On customer protection, the draft requires institutions to obtain explicit consent before onboarding customers onto products or services offered by affiliated entities. Firms would also be required to clearly disclose such arrangements in simple language and provide alternative options where available.

The framework further seeks to stop the merger of customer funds with those of related businesses. Under the proposed rules, customer deposits cannot be used for intra-group lending, proprietary trading, servicing group debts, or funding the operational expenses of affiliated companies.

In addition, the CBN proposed stricter data protection standards, stating that customer information must be stored separately from the systems of related entities to prevent unauthorised access and data commingling.

The apex bank also said promoters of closely linked entities would be required to establish a non-operating holding company structure. Shareholders who do not wish to adopt the arrangement may instead merge their businesses and surrender excess licences.

The draft guidelines have been released for public consultation, with stakeholders invited to submit comments and feedback on or before July 9.

The proposal comes alongside a separate June 10 draft guideline for financial holding companies (HoldCos), which seeks to tighten ownership requirements, including a minimum 51 percent shareholding in subsidiaries.