The interconnectedness of financial institutions has created opportunities for operational efficiency. In many cases, financial institutions hold interests in one or more financial service providers. This structure, however, raises some regulatory concerns, including: commingling of consumer funds; and the risk that the financial failure of one entity may adversely impact other closely linked entities.
In response to these concerns, the Central Bank of Nigeria (CBN) on June 11, 2026 issued the Draft Guidelines on Ring-Fencing Operations of Closely Linked Entities in the Nigerian Financial System (the “Proposed Guidelines”). The Proposed Guidelines seek to establish a framework that ensures closely linked entities maintain sufficient independence. In this newsletter we share insights into some of the provisions and requirements of the Proposed Guidelines.
Notable Highlights of the Proposed Guidelines
Enhancing Governance Oversight and Operational Independence
The Proposed Guidelines places emphasis on ensuring that closely linked entities maintain independence in their governance structures, operations, and risk management frameworks. Under the governance requirements, the Board of each closely linked entity is responsible for establishing measures to prevent excessive dependence on related entities. This includes implementing a ring-fencing policy and ensuring effective oversight by the Board Audit Committee of the entity. The Guidelines also limit the number of directors from an entity who may serve on the board of a closely linked entity to no more than twenty percent of the total board composition. In addition, the effectiveness of all implemented policies is to be assessed by an external auditor on an annual basis.
Beyond governance safeguards, the Proposed Guidelines introduce detailed ring-fencing obligations aimed at separating the legal, structural, and operational activities of closely linked entities. Each entity is expected to maintain its own governance, risk management systems, and internal controls, including a separate Board. Transactions between closely linked entities must be conducted on an arm’s length basis, properly documented, and structured in a manner that prevents the failure of one entity from affecting the solvency or critical operations of another.
Where entities rely on shared services within the group, such arrangements must be supported by formal service level agreements that clearly define responsibilities, pricing mechanisms, performance standards, and exit arrangements. Entities are also required to ensure that shared service structures do not compromise their ability to operate independently and prior approval is obtained from the CBN on such arrangements.
Safeguarding Customer Funds and Personal Data
The Proposed Guidelines introduce enhanced safeguards aimed at protecting customer funds and ensuring responsible management of customer information within closely linked entities. Entities are required to maintain clear separation between customer funds and group resources by prohibiting the use of customer funds for intra-group lending, securing group obligations, servicing debts, proprietary trading, or supporting the operational expenses of related entities. Entities are also expected to implement daily reconciliation processes to identify and resolve discrepancies in customer accounts within twenty-four hours. In addition, entities are required to disclose material intra-group transactions in their audited financial statements and provide customers with access to relevant information regarding their accounts and transactions.
The Proposed Guidelines also introduce data governance obligations, requiring entities to adopt appropriate measures such as encryption, access controls, and periodic audits to preserve data integrity, confidentiality, and security. Where customer or operational data is transferred between closely linked entities, such transfers must be done with the explicit consent of the customer. General data processing including data transfer is required to be done in accordance with the Nigeria Data Protection Act.
Protection of Consumers
To strengthen consumer protection, closely linked entities are required to ensure that the services offered by each entity within the group are clearly distinguishable to customers. Entities must avoid advertising, promoting, or providing services beyond the scope permitted under their respective operating licenses. In addition, complaint management processes are expected to operate independently within each entity to ensure that customer concerns are addressed without influence from related entities. Where services are delivered through or involve another closely linked entity, customers must be provided with clear and adequate disclosure to enable them understand the entity responsible for the service.
Formation of a Non-operating Holding Company
Under the Proposed Guidelines, the CBN requires promoters of closely linked entities to incorporate a non-operating holding company, which will function as a primary investment vehicle. The holding company is to hold interests in the subsidiary entities without participating in their day-to-day operations. The holding company is expected to maintain a minimum capital requirement exceeding the combined minimum capital requirement of its subsidiaries by at least twenty percent. In addition, the holding company must hold controlling interests in at least two financial services providers. Where the group structure includes a commercial bank, merchant bank, or non-interest bank, the applicable CBN regulations governing financial holding companies will continue to apply. For further information on the CBN’s recent draft guidelines on financial holding companies, please refer to our previous newsletter.
Conclusion
In anticipation of the Guidelines, it is advisable that promoters of financial institutions operating closely linked entities begin to assess their existing governance and operational arrangements as follows:
- evaluate the composition of the board of each entity to ensure it aligns with the Guidelines;
- review intra-group transactions;
- ensure that each entity’s terms of service clearly state instances where services will be provided by affiliates;
- begin to consider setting up a non-operating holding company for the purpose of holding investments in linked entities in line with the requirement of the Guidelines; and
- ensure that each entity provides only services permitted under the scope of its regulatory license.
It is important for every financial institution to pay close attention to the Proposed Guidelines and other applicable regulatory requirements to mitigate compliance risks. Failure to comply may result in penalties, including the revocation of licenses and other sanctions, in accordance with the Banks and Other Financial Institutions Act and other extant regulations.
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