Requirements of the Central Bank of Nigeria (CBN) Guidelines for Shared Services Arrangements for Banks and Other Financial Institutions in Nigeria, 2021

On 26 May 2021, the CBN published its Guidelines for Shares Services Arrangements for Banks and other Financial Institutions in Nigeria (the Guidelines). These Guidelines come into effect on 1^st June 2022.

Prior to this publication, there were no stated uniform practice for Shared Services Arrangements for Banks and other Financial Institutions in Nigeria. The Guidelines now sets out the minimum standards required for Shared Services and Transfer Pricing Arrangements in the Nigerian Banking and Financial Industry.

The Guidelines complement CBN’s Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeria and applies to Commercial Banks, Merchant Banks, Financial Holding Companies, other Financial Institutions, Payment Services Bank and other Payment Services e.g. MMOs, licensed by the CBN.

What are Shared Services Arrangements?

Shared Services Arrangements are arrangements whereby a member of a group provides services to one or more of its members within the same group (otherwise known as the recipients). The funding of these services is therefore, shared among the recipients.

The Aims of the Guidelines

The Guideline seeks to ensure compliance with transfer pricing regulations in Nigeria, regulate shared services arrangements, ensure good corporate governance practice and transparency in the Nigerian financial sector.

Approved Services

With CBN’s approval, Shared Service Agreements (SSA) may be entered into in respect of the following services:

1. Human resources
2. Risk management
3. Internal control
4. Compliance
5. Market and corporate communication
6. Information Communication Technology (ICT)
7. Legal services
8. Facilities (office accommodation including incidental services e.g. Security)
9. And other services which the CBN may approve from time to time.

Main Provisions of the Guidelines

Banks and Other Financial Institutions are to comply with the following in respect of shared services:

1. They are to have and submit their Shared Service Policies as approved by their respective Boards to the CBN. This is to be reviewed annually;
2. Recipient financial institutions are to, with the approval of the CBN, enter into an SSA with their parent Company in respect of Approved Services which they do not have the expertise and capacity to carry out.
3. Shared Services other than Approved Services under the Guidelines will not be charged to the Recipient Financial Institution by the donor.
4. Foreign subsidiaries will be charged for Shared Services based on the volume and complexity of services consumed by them in the case of technology acquired by the Financial Institution on their behalf.
5. In the case of technology transfer from the Foreign Parent to the Financial Institution (Nigerian subsidiary), the SSA executed by the parties must expressly convey right to beneficial use of the technology to the local Financial Institution.
6. The Boards of the respective Financial Institutions (the Parent and Subsidiary) are responsible for putting appropriate governance structures in place, overseeing, and ensuring compliance with existing legislations on Shared Services Arrangements.
7. Disclosure of Shared Services – This is to be done on the website of the financial institution and is to be contained in their Annual Report to the CBN, stating the importance of the shared services to the institution.
8. Documentation of Shared Service Fees- Financial Institutions must ensure that the fees in respect of Shared Services are adequately documented as though, the Parties are unrelated. It is not to be merely stated in a journal or entry or set-off against any inter-company account. Documentation could be through invoices, bills, contracts or other similar forms.

• There must be an annual submission of Independent Consultant’s Report reviewing the fees and services rendered and stating the extent of compliance by the Financial Institution with existing legislations.

The Independent Review Report is to be sent to the Director of the Banking/Financial Institution Supervision Department or the Director of the Payment Management System (as the case may be) on or before the 31^st January of each Accounting year and is to be submitted to the CBN on an annual basis.

Transfer Pricing Arrangements

Transfer pricing refers to the rules and methods for pricing transactions within institutions under a common control. It is how related parties price services and transactions among themselves.

Permitted Transfer Pricing Methods

1. Comparable uncontrolled price (CUP) method
2. Resale price method
3. Cost plus price method
4. Transactional net margin
5. Transactional Profit Split
6. Any other Transfer Pricing method that may be approved by CBN.

The Transfer Pricing method adopted by Financial Institutions is to be stated in their SSA.

Consequences of Non-compliance

1. The officers responsible for non-compliance may be liable to administrative sanctions.
2. The CBN Governor may impose such sum as the Governor deems fit, which shall not exceed the minimum penalty imposed under the CBN Act, Foreign Exchange (Monitoring and Miscellaneous) Provisions Act, the Credit Reporting Act and any other law relating to banking.

Conclusion

The Guidelines are intended to ensure that related parties engaging in shared services arrangements operate at arm’s length, that is, as if they are unrelated. There are variety of sanctions imposed by CBN for non-compliance. Banks and other Financial Institutions are therefore encouraged to develop systems for compliance well before the commencement date of 1st June 2022. Compliance is mandatory from 1st June 2022.

Please note that the contents of this Article are for general guidance on the Subject Matter. It is NOT legal advice.