What is Fit&Proper? Challenges Under the New Joint Fit&Proper Guidelines of ESMA and EBA
On 26 September 2017, the European Banking Authority ("EBA") and the European Securities and Markets Authority ("ESMA") published the final report of their joint guidelines on the assessment of the suitability of members of the management body and key function holders in accordance with Article 91 (12) of Directive 2013/36/EU ("CRD IV") and Article 9 of Directive 2014/65/EU ("MiFID II") (the "Fit&Proper Guidelines").
The Fit&Proper Guidelines aim to harmonise and improve suitability assessments within the European financial sector, and to ensure sound governance in financial institutions in line with CRD IV and MiFID II.
The management body of a credit institution must be suitable to carry out its responsibilities and be composed in such a way that contributes to the effective management of the credit institution and balanced decision-making.
In 2012, the EBA launched guidelines on the assessment of the suitability of members of the management body and key function holders ("Fit&Proper Guidelines 2012").
The Fit&Proper Guidelines 2012 set forth minimum requirements for suitability assessments and have been further spelled out by the Austrian Financial Market Authority ("FMA") in its fit&proper circular of November 2014 (the "FMA Fit&Proper Circular").On 15 May 2017, the European Central Bank ("ECB"), which has been responsible for making decisions on the appointment of all members of the management bodies of significant credit institutions that fall under its direct supervision since 2014, has published a guide on fit and proper assessments for members of the management bodies of significant credit institutions under the single supervisory mechanism. The guide explains how ECB banking supervision ensures consistency in the application of the fit and proper assessment criteria, with a view to establishing common supervisory practices for assessing the qualifications, skills and proper standing of a candidate across the EU. In its guidelines, the ECB expressly stated that it will comply with national law and any applicable suitability guidelines developed by the EBA and the ESMA.
The Fit&Proper Guidelines
AddresseesThe Fit&Proper Guidelines are primarily addressed to the competent authorities of the Member States – including the ECB – and cover the members of the management bodies of credit institutions, financial holdings and mixed financial holding companies as defined under Regulation 575/2013/EU ("CRR") and investment firms (together "Institutions" and each an "Institution").The competent authorities/Institutions are required to assess the suitability of management (executive) and supervisory (non-executive) functions, irrespective of whether the board structure is unitary or dual. For credit institutions and investment firms (as defined in the CRR), competent authorities/Institutions need to assess the suitability of all key function holders who have significant influence over the direction of the Institution, such as the heads of risk management, compliance and audit.
ProportionalityThe Fit&Proper Guidelines must be applied in a proportionate manner, taking account of the size, internal structure and type and complexity of the business of the Institution.
Individual and collective suitability assessmentThe Institutions shall assess the suitability of the individual members as well as the collective suitability of the entire management body (see related documents - Annex I (Template for the Assessment of Collective Suitability)).
Aspects to be considered in the selection process
- Sufficient time commitment to carry out their respective activities and enhance the requisite knowledge and skills (including limits on multiple directorships and other functions);
- Adequate (collective) knowledge, skills and experience: Aside from educational degrees and practical experience, Annex II lists a non-exhaustive set of personal skills, such as strategic acumen, judgement or teamwork;
- Reputation, honesty and integrity: regardless of the scale, nature and complexity of the Institution's business and the specific position;
- Independence of mind and independence (see below);
- Adequate human and financial resources for induction and training of members of the management body to understand an Institution's business model, structure and risk profile, and keep qualifications up-to-date; and
- Diversity to reduce group thinking, facilitate independent opinions and constructively challenge the decision-making process.
As outlined above, the Fit&Proper Guidelines differentiate between "independence of mind" and "being independent", which is a new concept regarding the assessment of suitability. The former means the ability of members to think critically and to perform their duties, especially in discussions and decision-making processes, without the influence of other people. It refers to a pattern of behaviour which has to be fulfilled by all members of the management body to be able to effectively assess, oversee and monitor decision-making. "Being independent" refers to certain members of CRD Institutions and means that they are independent in performing their supervisory functions.
Initial appointments and documentation requirements – what will change?For each requested suitability assessment, a set of documents and information needs to be submitted to the competent authority. The FMA has set out the scope of documents/information which needs to be provided for each requested suitability assessment in its Fit&Proper Circular (which in large parts reflects the Fit&Proper Guidelines 2012).
Going forward, the set of required documents and information for initial appointments set out in Annex III of the Fit&Proper Guidelines will be expanded to include the following:
- Personal details: A list of referees (which so far was limited to references of employers of the last three years, if applicable) as well as more details about the position for which the assessment is sought (eg a letter of appointment, any associated board minutes or a suitability assessment report, the planned start date as well as the duration of the mandate, a description of the individual's key duties and responsibilities and – if the person is replacing someone – the name of this person) need to be provided.
- Knowledge, skills and experience shall not only be demonstrated by a CV, but the Institution shall also enclose a statement of whether or not the individual has been assessed as having the requisite experience as per the Fit&Proper Guidelines and, if not, details of the training plan imposed, including the content, the provider and the date by which the training plan will be completed.
- Good repute, honesty, integrity: This is now subject to increasingly detailed and stringent requirements. For instance, information on "investigations, enforcement proceedings or sanctions in which the individual has been directly or indirectly involved."
- Conflicts of interest: All financial or non-financial interests that could create a potential conflict of interest need to be disclosed. The illustrative list of factors which could create a potential conflict of interest has been expanded and includes, amongst others, close personal or business relations with the Institution, its management, parent or subsidiaries or any person holding a qualified holding therein, as well as competing interests or any positions of political influence. If a material conflict of interest is identified, the Institution should provide a statement on how this conflict has been satisfactorily mitigated or remedied, including a reference to the relevant parts of the Institution's conflicts of interest policy or any bespoke conflict management or mitigation arrangements.
- Time commitment: More detailed information needs to be provided in order to show that the individual has sufficient time to commit to the mandate. This includes, eg annual and monthly minimum time indications devoted to the mandate, the number and nature of other commercial and non-commercial mandates, including the number of meetings per year dedicated to each mandate, etc.
- Collective knowledge, skills and experience: The Institution should provide an overall assessment of the collective suitability of the management body as a whole, including a statement on how the individual is situated in such overall suitability. Any gaps or weaknesses identified and measures imposed to address these need to be identified.
Monitoring and reassessment
Institutions are obliged to monitor the individual and collective suitability of the management body. Significant Institutions should perform a periodic suitability reassessment at least annually or if triggered by a specific event. Non-significant credit institutions should perform a periodic suitability reassessment at least every two years or in case triggered by a specific event.
The Fit&Proper Guidelines will enter into force on 30 June 2018, repealing the Fit&Proper Guidelines 2012 at the same time, and will be applied by competent authorities as of that date.
However, Institutions should apply the Fit&Proper Guidelines to any initial suitability assessment of members of the management body and key function holders appointed already before 30 June 2018.