Reassessing the suitability of bank directors – lessons from 2021

16 February 2022

Suitable directors are crucial for the proper functioning of a bank. Banks must therefore ensure the suitability of all members of their management body on an ongoing basis. Banks are required to notify their national competent authority (NCA) and the ECB of anything that may affect the individual or collective suitability of the members of their management body, or of key function holders in countries where national law requires supervisors to assess their suitability.

If there are severe findings concerning a bank director, the bank must reassess whether he or she is still suitable for the position. An internal reassessment by the bank would be necessary for cases involving money laundering or terrorist financing for example, where the findings have revealed structural root causes or systemic deficiencies in the functioning of internal controls, risk management and/or the management body. The ECB may also decide to carry out its own reassessment, which would take into account the bank’s internal reassessment of the director’s suitability. In addition to reassessments triggered by banks notifying their NCA and the ECB of new facts, the ECB also has the power to initiate a reassessment. The ECB has explained its reassessment approach and process in the updated Guide to fit and proper assessments.

Reassessments conducted in 2021

In 2021 the ECB carried out 17 reassessments for several members of the management bodies of banks in eight countries participating in European banking supervision. Of these reassessments, only five were triggered by banks notifying the ECB of new facts. In the other 12 cases, the ECB or the NCA approached the bank about the new facts, which came from a variety of sources, including facts gathered through ongoing supervision, the media, whistleblowing or breach reports.

As regards the new facts triggering the ECB’s reassessments in 2021, five were related to the anti-money laundering framework, four to criminal proceedings, two to civil proceedings and six to other issues such as bankruptcy and fraud. Each of these reassessments had a positive outcome and no board members had to be removed. Nevertheless, eight board members who were reassessed chose to resign from their positions before the reassessment process was concluded.

Lessons learned on internal reassessments

If the new facts result in severe findings, banks should conduct their own internal suitability reassessment. They should reassess the suitability of the director concerned in a thorough, critical, objective and independent way. As part of the process, banks may interview the director (internally) and consult external advisers.

Banks should document the outcome of the internal suitability reassessment in a report which:

• sets out the assigned duties, roles, responsibilities and reporting lines in order to establish whether any of the severe findings were under the responsibility and control of the director concerned;
• describes the events that took place, what went wrong and what actions were taken to address the findings and to stop them reoccurring in the future, as well as the lessons learned by the director concerned and by the management body as a whole;
• presents the conclusion on the suitability of the director concerned in relation to the applicable fit and proper criteria outlined in the Guide to fit and proper assessments.

Banks should submit the internal suitability reassessment report to their NCA and to the ECB. The relevant Joint Supervisory Team and the ECB’s Fit and Proper Division will then assess the report together with all other available information and decide whether a reassessment by the ECB is also necessary. If the facts are deemed material and their impact on suitability is considered serious, the ECB can take a formal decision, which can be negative.

Conclusion

In 2021 the ECB did not receive many notifications of new facts from the banks themselves, with most new facts emerging from other sources. However, banks are required by law (the SSM Framework Regulation) to notify the ECB and the relevant NCA of any new facts which could have an impact on the suitability of their management board members and key function holders. Failure to do so may lead to sanctions imposed by supervisors. Where there are severe findings, banks should also conduct their own internal suitability reassessment and share the assessment report with the ECB and the relevant NCA.

This article was prepared in collaboration with De Nederlandsche Bank.