Suitability tests for directors of financial institutions are a hot topic in the Netherlands. Both the EBA/ESMA and the ECB have published new draft guidelines for these tests at banks and investment firms. As we regularly help prospective managing and supervisory directors to prepare for the assessment, we have contributed to the public consultation on the draft guidance. We hope that our suggestions will help to improve the process.
In October 2016, the EBA and ESMA published draft joint guidelines on suitability tests for both banks and investment firms under CRD IV and MiFID II. The draft document deals with the assessment of members of the management body (both executive and non-executive directors) and individuals in key positions. Supervisory authorities in member states should ensure that banks, mixed financial holding companies, financial holding companies and CRD IV-investment firms comply with these guidelines.
In November 2016, the ECB, as the supervisory authority for certain banks, published a draft guide to fit and proper assessments. The guide aims to provide practical information about the assessment process carried out by the ECB. As a member of the EBA, the ECB was also involved in drafting the EBA/ESMA guidelines. DNB chaired the ECB committee which drafted the ECB guide.
The consultations have now closed. The EBA, ESMA and ECB will take the responses to the consultations into consideration and publish their final reports. It is expected that the final guidance will enter into force in mid-2017.
What will change in the Netherlands?
The guidelines reflect the current practice in the Netherlands. Contrary to many other member states, we already have a legal framework and process of screening, including the required documentation (for example, the suitability matrix). The new guidance of the EBA/ESMA and the ECB was actually inspired by the Dutch practice. Therefore, not much will change in the Netherlands. However, the following changes do need attention as it may be necessary to update internal documentation (processes):
- There are more detailed policy and documentation requirements regarding suitability, time commitment, diversity, induction and training.
- Institutions should carry out periodic re-assessments of the management body; the results of this should be documented and submitted to the management body (annually for significant institutions and every two years for non-significant institutions). The suitability matrix of the EBA/ESMA is a possible tool for these self-assessments.
- More information may or will be required for applications
submitted by appointees:
- The suitability matrix suggested by the EBA/ESMA is more detailed than the matrixes of DNB and the AFM;
- The ECB requires a specific "Conflict of Interest Statement" (also note that the ECB has a stricter interpretation of conflicts of interest than DNB);
- The ECB also asks for confirmation that ongoing learning, development and crisis buffers have been taken into account in the time commitment assessment;
- A specific reasoned statement must be provided to the ECB on how the appointee will contribute to the collective suitability needs (first: status quo, secondly: how the appointee will affect the status quo).
The Dutch Banking Code and the Dutch Corporate Governance Code also contain requirements regarding the diversity, evaluation and training of the management body. It is therefore likely that institutions already have certain policies and documents in place, but it may be necessary to update these.
What were our key suggestions during the consultation?
De Brauw has responded to the consultation of the ECB, which will be made public at a later date. Together with our Best Friends network we have also responded to the EBA/ESMA consultation on a jurisdiction-by-jurisdiction basis.
These are our most important suggestions:
- Fundamental practical suggestions to the ECB were for example:
- A Q&A which answers practical questions such as: how is it possible to speed up the process, examples of questions asked by the ECB in the interview, whether or not it is allowed to record the interview, etc.
- A clarification by the ECB that material conflicts of interest can only exist if such conflict would also exist under national law (in particular corporate law).
- To improve the diversity of the management board's composition, we suggested that the ECB make an explicit statement in its guide, affirming that persons outside the banking or financial sectors can also be part of the management body if they add specific relevant experience to the rest of the management body.
- Improvement of efficiency of the integrity test, for example by harmonising the integrity test forms throughout the member states. We also proposed, despite differences in national laws, to introduce a sort of "integrity passport". In other words: if an appointee has passed the integrity test in member state A, a new test would then not necessary in member state B unless new facts arose which could lead to a different outcome of the test. This would be very welcome in matters with a cross-border context.
- Inspired by the recommendations of the
Committee Ottow, which recently reviewed the Dutch practice on
suitability and integrity screening, we suggested the following to
- to explicitly include in the guide that the ECB takes a constructive attitude towards the application process, the credit institution and particularly the appointee;
- to take the UK practice of an "external advisor" on board;
- that the persons who decide whether a re-assessment by the ECB is necessary cannot be the same persons who decide about the outcome of the reassessment (clear distinction between ongoing supervision, fit and proper assessment, investigation of the new facts and enforcement).
How can we help you?
De Brauw regularly helps prospective managing and supervisory directors of financial undertakings and pension funds prepare for their integrity and suitability screening by the ECB, DNB and the AFM. We know from experience how important proper preparation is, and which topics deserve special attention for an interview. In addition, we give courses on financial markets regulation which can also be used to fulfil permanent education criteria.
See also our Legal Alert: Suitability and integrity screening – seven practical tips.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.