Earlier in 2019, the Central Bank of Nigeria (CBN) issued an Exposure Draft of its Guidelines on Shared Service Arrangements for Banks and Other Financial Institutions.
In 2021, the CBN published the final version of the Guidelines and informed Nigerian Banks and Other Financial Institutions of this development via its Circular of 26 May 2021.
The Guidelines on Shared Services Arrangements for Banks and Other Financial Institutions seek to address majorly the following:
- To set out supervisory expectation in respect of shared service arrangements between a parent company and its subsidiary.
- Ensure the fees charged under such arrangements are reflective of the services rendered.
- Ensure that these arrangements are reflective of arm’s length pricing according to Nigeria’s Transfer Pricing Regulations of 2018.
- Reduce operational costs of recipients of the covered services.
Affected financial institutions include the following:
a. Commercial banks;
b. Merchant banks;
c. Financial Holding Companies;
d. Other Financial Institutions;
e. Payment Services Banks; and
f. Other payment services as licensed by the CBN.
Provided that the financial institution is either:
(i) A parent company operating in Nigeria and licensed by the CBN; or
(ii) A subsidiary company licensed by the CBN and carrying on its operations in Nigeria.
Covered/ approved shared services under the Guidelines include:
a. Human Resources services;
b. Risk Management services;
c. Internal Control services;
d. Compliance services;
e. Marketing and Corporate communications;
f. Information and Communication Technology;
g. Legal services;
h. Facilities (Office Accommodation including Electricity, Security, Cleaning Services in that accommodation); and
i. Any other services as may be approved by the CBN from time to time.
Provided that:
i. the recipient entity does not have the expertise and capacity to carry out these services;
and
ii. any other service provided outside the aforementioned SHALL NOT be charged to the recipient entity.
Affected Institutions are further expected to have in place, shared services policies and procedures to ensure that shared services are conducted at arm’s length. This document is to be approved by the Board of the CBN and should, at the minimum;
- Detail the services to be shared;
- Indicate how the services would be shared, including the roles and responsibilities of the parties involved;
- Indicate the methodology for pricing shared services, including standards for timely recording and settlement (including frequency of settlement); )
- Specify the governance structure for reporting exceptions to policy; and
- Be reviewed annually.
Other provisions of the Guidelines bother on governance and oversight, detailed requirement / guideline for executing the shared services agreement and the allowable Transfer Pricing methods for determining the shared services fees (to be clearly noted in the Shared Services Agreement), which include:
a. Comparable Uncontrolled Price (CUP) method;
b. Resale Price method;
c. Cost Plus method;
d. Transactional Net Margin method;
e. Transactional Profit Split method;
f. Any other method which may be approved by the CBN.
In summary, Shared Service Arrangements among banks and financial institutions are required to be treated in similar manner as inter-company transactions among group entities – in line with Nigeria’s Transfer Pricing Regulations of 2018, with the CBN as the oversight body.
All financial institutions having shared services arrangements within their group are statutorily required to comply with the provisions of the Guidelines, failure for which there will be penalties.
The effective date for full compliance with the provisions of the Guidelines is 1 June, 2022.
For enquiries or help with complying with the Guidelines, please send an email to clients@vi-m.com.