What is fit and proper supervision?

18 March 2016

Fit and proper supervision has a gatekeeping function for banks’ boards of directors. As a supervisor, we must prevent individuals who would pose a risk to the bank’s correct functioning from either entering in the first place, or from continuing in their function if a serious issue arises. Board members must be capable of taking decisions that safeguard the safety and soundness of their own bank, but possibly also of the wider banking sector. In the first full year of ECB Banking Supervision, the Supervisory Board has taken more than 2,500 such decisions.

To whom does it apply?

The ECB only takes fit and proper decisions for directors of the 129 biggest banks in the euro area, in other words the banks we supervise directly. Fit and proper decisions for the less significant banks are still taken by the national supervisors, except in the case of a new bank license.

What must a potential board member do to comply with this requirement?

Since the fit and proper requirements stem from CRD IV, the ECB has to apply the national law of the 19 euro area countries in which the requirements are implemented. Fit and proper supervision unfortunately differs widely across countries. However, the same principles, set out in five essential criteria, apply to all candidates.

Five criteria for fit and proper assessment
Knowledge, skills and experience Does the candidate have the theoretical and practical capabilities to assume a specific role in the bank?
Reputation Does the candidate have a criminal record or a history of administrative or tax irregularities? Is the candidate involved in pending legal proceedings?
Conflicts of interest Board members must be able to act independently when taking decisions. Does the candidate have any conflicting interests that may adversely affect the bank?
Time commitment Can the candidate devote sufficient time to the proposed function within the bank?
Collective suitability of the board Looking at the added value of a particular candidate for the whole board, how does the candidate fit within the overall composition of the board?

How is a fit and proper assessment carried out?

To start with, the banks themselves have a responsibility to appoint suitable candidates. They must therefore have a robust process in place to select the best candidates. Banks then submit the candidate’s file to their national supervisor (not the ECB) for a fit and proper assessment. All national supervisors have their own forms. Once the process has started, the national supervisor will assist the Authorisation Division within the ECB and the Joint Supervisory Team (JST) responsible for the bank to come to a joint assessment. Involving the JST is important as it helps ensure that fit and proper decisions are in line with the overall supervision of the bank. The final decision is taken by the ECB.

So the whole process is paper-based?

Not completely. The assessment can always be discussed through informal contacts between the supervisor and the bank when preparing a candidate’s file. During the actual assessment procedure, we may also decide to interview the candidate; this is not a test as such, but simply a candid and open discussion. It is also a good opportunity for us to address our specific expectations of the candidate’s future role.

And, of course, if the ECB intends to object to the candidate, it always gives the candidate the right to be heard.

How long does the fit and proper assessment take?

The main factor driving timing is the availability of information; it depends on how fast the national supervisor can gather the relevant information and on what additional information is needed by the ECB. There are also certain deadlines set out in national law, and of course we respect these.

Can a candidate take up a position before getting the green light?

The point at which the assessment procedure is started varies from country to country: either banks have to apply to or notify their national supervisor once candidates have taken up their new roles, or they have to apply to the supervisor before candidates can start. These different national procedures complicate the work of the ECB considerably.

Does a favourable fit and proper decision give the candidate the right to work in any bank?

No, a fit and proper decision only reflects a moment in time. If a green light is given in a particular case, the candidate can take up that particular function in that particular bank. But if the person involved moves to a different bank or the situation changes somehow, they would have to undergo a new assessment and decision.

What are the next priorities for fit and proper supervision?

Our aim is to ensure a fair and consistent fit and proper assessment process across all euro area countries. Banks have to know what to expect. We would therefore like to see the fit and proper process become part of the revision and update of CRD IV so that the same rules are applied throughout Europe.

Have you ever refused a candidate proposed by a bank?

First of all, we don’t make fit and proper decisions public. Looking back on the first full year of ECB Banking Supervision, we had a couple of cases where the assessment was negative. It is good to note that our decisions are not always simply positive or negative. Sometimes we impose requirements on the candidate and the bank to address specific concerns; for example we may require the candidate to do specific training, to keep us informed on a pending legal proceeding or to relinquish a function outside the bank. And more than in any other field of supervision, we can often reach our objectives in an informal way. Banks quite regularly decide to withdraw candidates if it becomes clear that concerns cannot be remedied.