Bolstering fit and proper supervision
18 November 2020
Robust governance is one of the cornerstones of the sound and prudent management of supervised credit institutions. This is why banks’ management bodies need to include members that are suitable to fulfil their executive and non-executive responsibilities throughout their entire term. While banks are responsible for selecting suitable appointees for vacant board positions, the ECB and the national competent authorities are tasked with assessing the suitability of each appointee – this is fit and proper supervision.
Since the start of European banking supervision, the ECB has focused on ensuring the highest standards in fit and proper supervision and on promoting a level playing field in the assessment of board member suitability. This has not been easy, as the underlying rules and regulations are not fully harmonised across Europe – for example, the timing of suitability assessments varies across countries.
With progress towards full harmonisation being limited, the ECB is now taking further steps to enhance fit and proper supervision within the current regulatory framework: the Supervisory Board has approved a comprehensive package of measures, which are now being implemented.
First, the ECB wants to be more transparent about its supervisory expectations regarding the quality of appointees. To this end, the ECB plans to publish a revised handbook to replace the current Guide to fit and proper assessments in 2021. This handbook will enable banks to gain a better understanding of what is expected before they make appointments. It will also help banks predict the outcome of suitability assessments and increase the efficiency of the overall assessment process.
Second, the package will increase the ECB’s influence early on in suitability assessments that, under some national laws, are conducted after the appointee in question has taken up the vacant position (known as ex post assessments). This will bring this type of assessment more into line with assessments that are carried out before the position is taken up (ex ante assessments). These prior assessments are better aligned with the objectives of prudential supervision, since only suitable board members should be appointed. In the event of an ex post assessment with a negative outcome, the respective board member would already be in the role and would thus need to be removed. However, the removal of an acting board member entails reputational risks for the respective bank and the ECB. To avoid such a scenario, ECB Banking Supervision will implement a new approach. Without prejudice to the applicable national laws, banks that are subject to an ex post assessment regime will be encouraged to provide the ECB with their suitability assessment applications for executive board members before making appointments. The new approach should not in any way impede the ongoing regular supervisory dialogue with banks on envisaged appointments.
Third, the package aims to enhance the scope of assessments for appointments (and reappointments) of board members. This is particularly relevant for appointees who previously held board positions at banks that received severe supervisory findings. These findings – which reflect shortcomings that need to be remedied by banks – should be given greater consideration in the assessment of a board member’s suitability. The current approach only takes into account any direct links between the role and responsibilities of a board member and the supervisory findings. In other words, was the appointee personally involved in the issue and was he or she responsible for the infringement? However, the new approach will also consider individual accountability at board level. After all, the whole board is responsible for managing a bank, with all board members being part of the decision-making process when an infringement occurs: mutual challenge is a key characteristic of well-functioning boards.
Fourth, drawing on recent experience gained by the ECB, the package will clarify the process for reassessing suitability. The ECB will provide more detailed guidance on how the emergence of new material facts could affect the suitability of board members. In addition, since money laundering risks are increasingly relevant for prudential supervision, the ECB will also provide specific guidance on findings relating to money laundering.
The objective of the new approach is to enhance fit and proper supervision by making it more efficient, while also allowing for greater scrutiny of board members. This will help ensure that banks appoint suitable board members. This, in turn, will have a positive impact not only on the safety and soundness of individual banks but also on the wider banking sector, as it will increase the public’s trust in those who manage the financial sector.