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Fit and proper for better governance

The financial crisis identified significant weaknesses in the functioning and composition of banks’ management bodies. Amongst other factors, these led to shortcomings in risk management, insufficient implementation of sound corporate governance and a lack of effective oversight of management. As a result, steps were taken to strengthen the supervision and assessment of banks’ board members. In this context, ECB Banking Supervision acts as a gatekeeper, ensuring that banks have robust governance arrangements and suitable board members.

Within the Single Supervisory Mechanism (SSM), the ECB and the national competent authorities (NCAs) jointly assess the fitness and propriety of new board members against five criteria: experience, reputation, conflicts of interest and independence of mind, time commitment, and collective suitability. When applying these criteria, ECB Banking Supervision follows a case-by-case approach which takes into account the specificities of national law, as well as the distinctive features of different banks and of each role within their management bodies. This process is closely linked to the on-going supervision of banks’ governance and risk management, which in turn constitutes a crucial element of the Supervisory Review and Evaluation Process (SREP).

Five criteria for fit and proper assessment
Experience Does the candidate have the theoretical and practical capabilities to assume a specific role in the bank?
Reputation Does the candidate have a clean criminal record and no history of administrative or fiscal irregularities? Pending legal proceedings are also taken into account.
Conflicts of interest and independence of mind 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 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? Is the diversity of the board adequately considered?

The typical SSM assessment process starts with the bank notifying the NCA of the (proposed) appointment. The NCA then informs the ECB and they both collect all the necessary information and carry out a joint assessment. If the outcome of the assessment raises concerns about a candidate, the ECB can include recommendations, obligations or conditions in its decision to address them. If concerns cannot be adequately addressed using one of these tools, the ECB will make a negative decision.

While the case-by-case approach in the ECB’s fit and proper assessment is paramount, it also poses challenges. One of the biggest is to achieve a level playing field and to overcome the complexity stemming from a “patchwork” of 19 different jurisdictions, especially in the light of the high number of assessments. Since the SSM came into force in November 2014, the ECB has issued decisions on more than 6,000 fit and proper assessments.

In general, the Capital Requirements Directive IV (CRD IV) and the guidelines on the suitability of members of the management body published by the European Banking Authority (EBA) aim to provide harmonisation at both the legislative and the regulatory level. However, these rules are not directly applicable but need to be transposed into national law. The fact that governance rules are subject to minimal harmonisation means their implementation differs among the 19 countries of the Euro system. In this context, the European rules need to be reviewed to ensure greater consistency and a level playing field.

This makes fit and proper assessments particularly complex, since legislative differences affect both procedural and substantive aspects. The fact that deadlines for different steps of the decision-making process differ from one country to another is one example. Deadlines for final decisions vary significantly, ranging from the 30 days required in some jurisdictions to no deadline at all in others. Additionally, while the majority of member states have opted for an ex-ante assessment – meaning that nominated board members cannot step in until they receive the “green light” from the supervisory authorities – a significant number have adopted an approach where designated board members take up their positions before the supervisory decision has been issued. Further differences concern the type of information that banks are required to provide or the possibility of suspending or interrupting the assessment process.

The implementation of the principle of proportionality also contributes to differences across countries. While proportionate assessment rules for small banks are generally welcomed, differences in the interpretation and application of this principle sometimes pose a challenge to ensuring consistency across different jurisdictions. Finally, differences among member states can also result from other national rules to which the suitability framework refers. This is the case, for instance, when it comes to the relevance of criminal proceedings to the reputation of board members: conduct which is a crime in one jurisdiction might well be sanctioned only at an administrative level in another, and vice versa. As a consequence, similar conduct might have different effects for fit and proper decisions in different jurisdictions.

When fulfilling its role of gatekeeper, ECB Banking Supervision needs to apply national law, taking into consideration all the specificities in each country’s legal system. This inevitably jeopardises its priority of creating a level playing field in the European prudential framework. Bound by the limits of applicable national law, ECB Banking Supervision can only ensure that the application of the fit and proper requirements across all participating countries is to the highest possible extent fair and consistent.

In terms of substance, the consistency objective is being pursued through the development of policy stances on the interpretation of assessment criteria. In addition, best practices in national member states are identified and shared at the European level. All policy stances and practices have been developed in close cooperation with the NCAs and have also recently been published in the form of an ECB guide to fit and proper assessment.

On the procedural side, the ECB has introduced a number of support documents for banks. One example is the introduction of a standardised fit and proper questionnaire, which helps achieve greater consistency in applications across countries.

Although the tools and measures used and adopted so far have enabled significant progress towards achieving a level playing field for fit and proper assessments throughout the SSM countries, ECB Banking Supervision would welcome a more harmonised implementation of CRD IV. The same rules should be implemented in the same way throughout Europe to ensure that management bodies are assessed equally and the complexity of fit and proper assessments is indeed reduced. This would enable supervisors to focus more closely on more material elements of fit and proper assessments and ultimately strengthen the governance of European banks.

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