ECB launches consultation on guide to assessments of Board members
What should directors expect in a “fit and proper” assessment?
Banking alert | 17 November 2016
Since November 2014, the ECB, through the Single Supervisory Mechanism, has been ultimately responsible for the appointment, re-appointment and re-assessment of all members on the Boards of significant credit institutions which fall underneath its direct supervision. The ECB has launched a consultation on a draft guide on fit and proper assessments. The guide explains how ECB Banking Supervision evaluates the qualifications, skills and proper standing of a candidate for a position on the board of a bank.
Given that the fit and proper requirements stem from CRD IV, this leaves room for Member States to determine how legislation is transposed and may lead to national differences. In this sense, the draft guide sets out to harmonise the implementation and assessment criteria applicable to fit and proper assessments with the intent of achieving common supervisory practices. These guidelines complement the EBA’s Guidelines on the Assessment of the Suitability of Members of Management Body and Key Function Holders.
The fitness and propriety of Board members is broadly assessed against the following five criteria:
Board members shall be assessed on both their practical and professional experience gained in previous occupations and theoretical experience gained in their academic formation. As a minimum, the financial institution should submit a detailed CV for the appointee and should also outline ongoing and scheduled training plans for the appointee.
An appointee shall be considered to be one of good repute if there is no evidence to suggest otherwise and there is no reason to doubt the appointee’s repute. Any pending, or concluded, criminal or administrative proceedings may have an impact on the reputation of the appointee and shall thus be taken into consideration.
(3) Conflicts of interests and independence of mind
Each supervised entity should have policies and procedures in place which manage the risk posed by conflicts of interests whether actual, potential or perceived. It would be acceptable for a member to have conflicts of interests if these were mitigated or managed appropriately.
Each member is expected to exercise independent judgment in the fulfilment of his or her duties and the Joint Supervisory Team (JST) will consider any evidence which suggests that the appointee has failed to act with independence of mind in previous or current functions.
(4) Time commitment
All Board members must be in a position to commit sufficient time to the exercise of their duties. The holding of multiple directorships is an important factor that may affect the ability of a Board member to commit sufficient time to the institution.
(5) Collective suitability
Banks are primarily responsible for identifying gaps in the collective suitability of its management body as a whole. The outcomes of the collective suitability assessment should be analysed by the institution, and specifically provide input for training needs. When motivating an appointment, financial institutions must take care to provide arguments as to how the appointee will contribute to the collective suitability of the Board as a whole. In order to conduct the collective suitability assessment, institutions may use the suitability matrix template published by the EBA in its Guidelines on the Assessment of the Suitability of Members of Management Body and Key Function Holders. This template maps experience of board members to specific requirements around the business model, organisational structure, risk management and overall decision-making.
Interviews are one of the tools used in the information gathering phase of the fit and proper assessment to determine the relevant facts. It is reasonable to expect that prospective appointees will be questioned on their experience, their knowledge of the regulatory environment, their understanding of the bank’s business model and major risks which may threaten its sustainability. It is likely that the feedback obtained during the interview process will feed into the decision taken by the regulator on the Board member’s fit and proper assessment.
How we can help
Our SREP Transformation service offering includes a Governance Transformation module which consists of the following:
- Board evaluation service. In addition to conducting a collective suitability assessment in line with the revised guidelines, our approach incorporates a number of techniques including reviewing board documentation, sitting in board meetings to assess board dynamics, challenging board members through interviews and running case studies.
- Board training. We offer training on a range of risk and regulatory topics. Our training menu will be designed based on knowledge gaps identified in the collective suitability assessment as well as any other areas of interest identified by the board.
- Gap Analysis on corporate governance policies and procedures. Our Gap Analysis Tools are used to assess compliance specified in the EBA SREP Methodology.