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ECB Publishes Practical Fit and Proper Assessments Guide for Board Members of Credit Institutions

18 May 2017 | legal insights

On 15 May 2017, the European Central Bank ("ECB") published a guide on fit and proper assessments (the "Fit and Proper Guide"), which reflects the result of a public consolidation launched by the ECB on 16 November 2016.

Since November 2014 the ECB is responsible[1] for making decisions on the appointment of all members of the management bodies of significant credit institutions[2] (the "supervised entities"). While the ECB guide to banking supervision published in 2014 only briefly addresses the suitability of members of management bodies of supervised entities, the recently published Fit and Proper Guide aims to provide a detailed description of policies, practices and processes applied by the ECB in assessing the suitability of board members and to improve transparency. It also aims to harmonise the application of assessment criteria applicable to fit and proper assessments in order to establish a common supervisory practice for assessing the qualifications, skills and proper standing of a candidate for any such position.

The Fit and Proper Guide is not a legally binding document; it is intended to be a practical tool that will be updated regularly to reflect new developments and experience gained through practice.

Assessment principles

Primary responsibility for selecting and nominating fit and proper board members, both at their initial appointment and on an ongoing basis, rests with the supervised entities. Supervised entities must notify the relevant national competent authority (the "NCA") of all board member appointments and must provide all information necessary for the fit and proper assessment to the NCA. The NCA then informs the ECB and the institutions jointly collect information, assess the appointee's suitability and present a proposal to the supervisory board and the governing council of the ECB.

The Fit and Proper Guide acknowledges that the fit and proper assessment should be proportionate to the size of the supervised entity and the nature, scale and complexity of its activities, and should fit the particular position to be filled.

Assessment criteria

The Fit and Proper Guide provides a detailed description of criteria for determining suitability:

  • Experience

    This covers practical experience gained through previous occupations and theoretical experience (skills and knowledge) gained through education and training, each of which must be sufficient for the relevant function. While practical experience is assessed based on previous positions held, theoretical experience is assessed on the level and profile of the respective board member's education.

    All members of the management body are expected to possess, at a minimum, basic theoretical banking experience in the seven areas listed in the guide (including financial markets, regulation, strategic planning, risk management, accounting and auditing) in order to understand the institution's activities and main risks. However, the level and nature of experience required of a member of the management body may differ from that required of a member of the supervisory body, in particular if these functions are performed by separate bodies.

    To increase efficiency and reduce the length of assessment periods, a two-stage approach is followed:

    In stage one experience is assessed against guiding presumptions of sufficient experience, which in turn is based on certain minimum service periods ("thresholds"). If the thresholds are met, the appointee is ordinarily presumed to have sufficient experience, unless there is an indication to the contrary. The Fit and Proper Guide includes concrete periods of experience in areas related to banking or financial services for the respective position, eg 10 years of recent practical experience for a CEO and five years for a director.

    Stage two provides the possibility for supervised entities to justify the suitability of the appointee in case the thresholds at which sufficient experience is presumed are not met. Examples of justifications may include a training plan in case of a partial lack of experience, the overall collective suitability of the members of the management body already present or appointment for a specific role limited in time only (such as in an institution in wind-down).
     
  • Reputation

    Good reputation will be presumed as long as no evidence suggests otherwise or any doubt is raised.

    Any legal proceedings (pending as well as concluded) must be disclosed, as they may have an impact on reputation. The Fit and Proper Guide provides for a minimum set of information that will be required from the appointee, the supervised entity and/or prosecution authority in this regard.
     
  • Conflicts of interest and independence of mind

    Board members should be able to make sound, objective and independent decisions, which can be affected by conflicts of interest. The supervised entity thus must have governance policies in place to identify, disclose, mitigate, manage and prevent (actual, potential or perceived) conflicts of interest.

    The Fit and Proper Guide provides comprehensive guidance, including a table, on the degree and type of connection and thresholds indicating potential material personal, professional, financial or political conflicts of interests.

    The supervised entity must assess the materiality of the risk posed by any conflict of interest and, in case materiality is determined, adopt adequate mitigating measures pursuant to its internal policy.
     
  • Time commitment

    All members of the management body must be able to commit sufficient time to performing their functions. Therefore, the supervised entity has to provide, at a minimum, a specification of the time commitment required for such a role, a list of mandates or positions requiring a time commitment from the appointee and a self-declaration of the appointee that he/she has sufficient time. CRD IV further limits the holding of multiple directorships for members of the management body of a CRD IV significant institution to one executive directorship with two non-executive directorships or four non-executive directorships.

    The guide details a qualitative and quantitative assessment of time commitment, lists certain exemptions and privileged (eg intragroup) positions, and proposes a calculation model.


Interviews

The Fit and Proper Guide emphasises the importance and advantageousness of interviews in the assessment process and provides further guidance on the interview process. Interviews will be conducted for any new appointments to CEO and chairman positions at standalone banks and the top banks of groups, as these positions entail the most risk. Otherwise interviews are a discretionary tool for fit and proper assessments.

Assessment process


The Fit and Proper Guide also provides an overview on the assessment process, wherein the NCA functions as an entry point and the ECB is the decision-maker. Different procedures are followed for new appointments, renewals, changes of roles or resignations, new facts and licensing as well as qualifying holding procedures.

Decisions

An appointee is either considered fit and proper or not. However, the ECB has the power to include recommendations, conditions or obligations in positive decisions. A categorisation of such decisions is also included.

As outlined above, the Fit and Proper Guide is intended to be a practical tool that will be updated regularly to reflect new developments and experience gained in supervisory practice. We will monitor these developments and provide any updates.

 


[1] Article 4(1)(e) of Council Regulation (EU) No 1024/2013 of 15 October 2013 (SSM Regulation); Articles 93 and 94 of Regulation (EU) No 468/2014 (SSM Framework Regulation).

[2] Institutions under the direct supervision of the ECB.

Ursula Rath

Partner

T: +43 1 534 37 50412
F: +43 1 53437 66100

Martina Hiebl

Associate

T: +43 1 53437 50411