Related-party transactions, or RPTs, are a normal feature of corporate and banking activity. Groups share services, provide funding, transfer assets, employ common technology platforms and enter into arrangements with controllers, subsidiaries, associates and key management personnel. The problem is therefore not the existence of an RPT. The problem arises when the relationship influences the identification, pricing, approval, monitoring or disclosure of the transaction.
The Basel Core Principles address this directly. Principle 20 requires banks to conduct related-party transactions on an arm’s-length basis, monitor them, control or mitigate the resulting risks and apply normal policies when writing off related-party exposures. It interprets “transaction” broadly, covering credit exposures, service contracts, purchases and sales of assets, leases, derivatives, borrowings and write-offs.
This makes RPT governance more than a company-secretarial or accounting exercise. It is a prudential discipline concerned with the protection of capital, liquidity, depositors, minority shareholders and the integrity of institutional decision-making.
1. Identification must extend beyond the legal counterparty
The foundation of sound governance is a complete and current related-party register. A weak register normally produces weak approval, aggregation, disclosure and limit-monitoring outcomes.
- Controllers and beneficial owners;
- Subsidiaries, associates and special-purpose entities;
- Directors, senior management and other influential employees;
- Close family members and entities controlled or influenced by them;
- Connected suppliers, advisers or intermediaries;
- Parties that became related after an exposure was originated.
The register should be treated as a live control dataset, not an annual declaration exercise. It should be refreshed when a director or senior manager is appointed, ownership changes, a group is restructured, a new vendor is onboarded, a material transaction is proposed or annual conflict declarations are received.
The most important test is not whether a register exists, but whether the institution can detect an undisclosed relationship independently. Matching director declarations, beneficial-ownership information, vendor records, employee data, credit systems and group structures can reveal relationships that self-declaration alone may miss.
2. The board must own the framework
RPT governance cannot be left entirely to management because management may itself originate, recommend or benefit from a transaction. The board should approve the RPT policy, materiality framework, exposure limits and delegation structure.
- Material and unusual RPTs;
- Aggregate exposures to related parties;
- Transactions approved under delegated authority;
- Policy exceptions and limit breaches;
- Director abstentions and conflicts;
- Adverse valuations or loss-making arrangements;
- Overdue balances, restructurings and write-offs;
- Remediation of control weaknesses.
The board should not merely confirm that the correct signature appears on an approval paper. It should ask why the institution is entering the transaction, what commercial benefit it receives, whether the same outcome could be obtained from an unrelated party, how the price was determined, what the downside is under stress and whether value or risk is being transferred outside the regulated entity.
3. Independence and conflicts must be visible and evidenced
A conflict declaration by itself does not remove a conflict. It only identifies it. Interested directors and executives should be excluded from negotiation, evaluation, valuation, recommendation and approval. Their abstention should be specifically recorded in committee and board minutes. Where the remaining decision-makers lack sufficient independence or expertise, the institution should obtain external advice or refer the matter to independent directors.
A supervisor should look for evidence of procedural independence, including who initiated the transaction, selected the valuer, determined the assumptions, negotiated the terms, prepared the recommendation and voted on the approval.
4. Arm’s-length status must be demonstrated, not asserted
“Commercial terms” or “market rate” written in an approval memorandum is not sufficient evidence. An arm’s-length assessment should consider the full economic package: price, fees, tenor, repayment, collateral, guarantees, covenants, options, waivers, settlement, expenses and liabilities.
Evidence may include competitive quotations, recent comparable transactions, independent valuations, market benchmarks, transfer-pricing analysis or documented cost-allocation methodologies. For unique assets or complex services, the institution should explain the valuation method, assumptions, limitations and sensitivity of the result.
Governance should also assess whether the transaction was fair to the regulated institution. A transaction can technically match a benchmark but still be unfair because of weak collateral, unusually long settlement periods, one-sided indemnities or the transfer of future risks to the bank.
5. Delegation must not become a route around scrutiny
Delegated authority can improve efficiency, but it creates a risk that transactions will be divided, renewed or modified so that each individual event remains below a board or regulatory threshold. The policy should aggregate RPTs by counterparty and beneficial owner, connected group, economic purpose, asset or project and rolling time period.
Renewals, extensions, waivers, collateral releases, restructurings, novations and write-offs should be treated as governance events. Transaction-splitting should be expressly prohibited. Management approvals under delegated authority should be reported upward within a defined period, with cumulative exposure shown against the relevant threshold.
6. Control functions must have distinct responsibilities
| Control function | Expected contribution |
| Compliance | Verify related-party classification, approvals, notifications and policy compliance. |
| Risk management | Assess credit, market, liquidity, concentration and capital implications before approval. |
| Finance | Confirm valuation entries, accounting treatment, impairment, consolidation and disclosure. |
| Legal | Assess enforceability, authority, security, conflicts and contractual protections. |
| Internal audit | Test the completeness of the RPT population and operating effectiveness of controls independently. |
The control functions should be allowed to disagree. A transaction should not be characterised as acceptable merely because every function was asked to sign the same management paper.
7. Disclosure must communicate substance
IAS 24 requires disclosure of the nature of related-party relationships and information about transactions, balances and commitments needed to understand their potential effect on the financial statements. Technically compliant disclosure may nevertheless be uninformative if transactions are combined into broad categories that obscure their economic significance.
- Who the related party is and the nature of the relationship;
- Transaction value, outstanding balances and commitments;
- Pricing and valuation basis;
- Guarantees or collateral;
- Approval route and abstentions;
- Provisions, impairments or write-offs;
- Prudential and financial impact.
Disclosure should be consistent across board reports, regulatory returns, published financial statements and the underlying transaction register. Unexplained differences between these sources are a significant red flag.
8. The framework must be supervisor-testable
The final governance test is whether the institution can reproduce its complete RPT population and evidence the life cycle of each material transaction.
- The related-party relationship;
- Initial proposal and commercial rationale;
- Conflict declarations;
- Independent valuation or benchmarking;
- Risk, compliance, finance and legal assessments;
- Approval and abstention records;
- Contract and accounting entries;
- Exposure-limit monitoring;
- Board and regulatory reporting;
- Financial-statement disclosure.
A supervisor should be cautious where the institution cannot generate its RPT population independently of the business unit that originated the transactions. Other concerns include manually maintained registers, retrospective approvals, missing abstention records, identical valuation language across unrelated transactions, fragmented exposures and board papers that omit the transaction’s prudential effect.
From formal compliance to demonstrable governance
Good RPT governance is not achieved by prohibiting all transactions with connected persons. RPTs may be operationally necessary and commercially beneficial. The governance objective is to ensure that the relationship does not distort the transaction.
- All relevant relationships were identified;
- The transaction served the institution’s interests;
- Terms were independently evaluated;
- Conflicted persons had no influence over the decision;
- Connected transactions were aggregated;
- Prudential consequences were considered;
- Approvals occurred before commitment;
- Reporting and disclosure were complete;
- The process can be independently reconstructed.
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
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
Basel Committee on Banking Supervision. (2015). Corporate governance principles for banks. Bank for International Settlements. https://www.bis.org/bcbs/publ/d328.htm
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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