Related-party transactions (RPTs) are important controls in banking and finance, especially for financial groups. Banks and other financial institutions routinely share services, provide funding, transfer assets, issue guarantees and enter into arrangements with parent companies, subsidiaries, controllers, directors and key management personnel. These transactions may be commercially legitimate, but the relationship can distort judgment, pricing and risk acceptance. For that reason, RPT oversight must be treated as a core governance and prudential responsibility rather than a narrow accounting-disclosure exercise.
Basel Principles expects banks to conduct transactions with related parties on an arm’s-length basis, monitor them, control or mitigate the associated risks and ensure that write-offs follow normal policies. IAS 24, meanwhile, focuses on identifying relationships and disclosing transactions, balances and commitments. Effective oversight connects these requirements with board accountability, risk appetite, independent challenge and reliable transaction-level evidence.
RPT oversight matters, as RPTs can transfer value out of a regulated institution, concentrate exposures within a controlling group, conceal weak asset quality or create implicit support obligations. They can also disadvantage depositors, policyholders, clients or minority shareholders. The same transaction may simultaneously create credit, liquidity, market, operational, conduct, accounting and reputational risks.
The oversight framework should therefore be based on sound ppractices. A few of them discussed below –
A. Clarity of Identification : The register should cover legal and economic relationships, including controllers, beneficial owners, group entities, associates, directors, senior management, close family members and entities they control or significantly influence. The institution should also identify parties that become related after a transaction is originated.
Annual declarations are useful but insufficient. Data should be refreshed at onboarding, appointment of directors or executives, ownership changes, group restructurings and before material approvals. Independent checks against beneficial-ownership records, vendor masters, employee data and core banking records are essential.
B. Board Ownership and Oversight: The board should approve the RPT policy, materiality thresholds, exposure limits and delegation matrix. It should receive periodic reporting on material transactions, aggregate exposures, exceptions, recusals, overdue balances, restructurings, write-offs and unresolved control weaknesses.
- Non-routine, complex, high-value or loss-making RPTs should be escalated to the full board or an independent board committee.
- Board papers should explain the commercial purpose, alternatives, pricing evidence, downside risks and prudential impact.
- Approval should occur before the institution becomes legally or economically committed.
- The minutes should show challenge, dissent, abstentions and the basis for the decision.
3. Remove the Conflicted from Decision Chain : Disclosure of a conflict is only the first step. Interested directors and executives should be excluded from negotiation, valuation, recommendation, approval and subsequent monitoring. Recusal should be recorded explicitly. Where independence is limited, external valuation or advice may be necessary.
Supervisors should examine who initiated the transaction, selected the valuer, set assumptions, negotiated terms, prepared the paper and voted. A conflicted person can influence a transaction without formally voting on it.
D. Establish Arm’s Length Terms : An assertion that a transaction is “at market” is not evidence. The assessment should cover price, fees, tenor, security, covenants, settlement, termination rights, credit assessment and risk allocation. Evidence may include competitive quotes, comparable transactions, independent valuations, market data or a documented cost-allocation methodology.
E. Controls Exist in Practice : Delegation improves efficiency but can become a route around scrutiny. The policy should aggregate connected transactions by counterparty, beents, collateral releases, restructurings, novations, guarantees and write-offs should be treated as RPT events.
F. Effective Reporting Channels : Board and public reporting should identify the related party, relationship, value, outstanding balance, pricing basis, approval route, recusals, security, impairment and prudential effect. Broad categories should not obscure a transaction’s economic significance. The RPT register, board reports, regulatory returns and financial statements should reconcile. Unexplained differences are a red flag because they may indicate incomplete capture, classification errors or selective disclosure.
G. Subject to Independent Verification : For each material RPT, the institution should be able to reconstruct the complete lifecycle: relationship identification, proposal, conflict declarations, valuation, control-function review, approval, contract, accounting entries, exposure monitoring and disclosure. Supervisors and internal auditors should be able to reproduce the population without depending on the originating business unit.
- Compare transaction dates with approval dates and system posting dates.
- Search for fragmented transactions with common beneficiaries or economic purposes.
- Test whether related parties received exceptions not available to ordinary customers.
- Review overdue exposures, repeated restructurings, collateral releases and write-offs.
- Trace material disclosures back to contracts, ledgers and board records.
Sound RPT oversight permits legitimate group transactions while preventing influence, opacity and concentration from weakening the regulated institution. The board must own the framework, conflicted persons must be removed from decision-making, arm’s-length claims must be evidenced, transactions must be aggregated and the entire process must be independently reproducible.
The central supervisory question is therefore not whether the institution has approved an RPT. It is whether the institution can demonstrate that the transaction was necessary, fair, prudently structured and decided in the institution’s own interests.
Select References
Basel Committee on Banking Supervision. (2024). Core principles for effective banking supervision. Bank for International Settlements. https://www.bis.org/bcbs/publ/d573.pdf
Basel Committee on Banking Supervision. (2015). Corporate governance principles for banks. Bank for International Settlements. https://www.bis.org/bcbs/publ/d328.htm
IFRS Foundation. (2025). IAS 24 Related Party Disclosures. https://www.ifrs.org/content/dam/ifrs/publications/html-standards/english/2025/issued/ias24.html
Organisation for Economic Co-operation and Development. (2023). G20/OECD Principles of Corporate Governance 2023. OECD Publishing. https://doi.org/10.1787/ed750b30-en
Organisation for Economic Co-operation and Development. (2025). OECD Corporate Governance Factbook 2025. OECD Publishing. https://www.oecd.org/en/publications/oecd-corporate-governance-factbook-2025_f4f43735-en.html
European Banking Authority. (2021). Guidelines on internal governance under Directive 2013/36/EU (EBA/GL/2021/05). https://www.eba.europa.eu/sites/default/files/document_library/Publications/Guidelines/2021/1016721/Final%20report%20on%20Guidelines%20on%20internal%20governance%20under%20CRD.pdf
Financial Conduct Authority. (2026). UKLR 8: Equity shares (commercial companies)—related party transactions. FCA Handbook. https://handbook.fca.org.uk/handbook/uklr8
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