The European Banking Authority (EBA) has today published Guidelines on the assessment of the suitability of members of the management body and key function holders, setting out the process, criteria and minimum requirements for assessing the suitability of those persons. The Guidelines contain provisions to be followed by both credit institutions and competent authorities when assessing the suitability of all members of the management body and key function holders (such as heads of significant business lines, EEA branches, third country subsidiaries, support and internal control functions). Financial and mixed financial holding companies (in case of a financial conglomerate whose most important sector is banking) are within the scope of the Guidelines because of the significant influence they have on their credit institutions.
The following note summarises the key requirements that the Guidelines place directly on credit institutions. Assessing the initial and ongoing suitability of members of the management body and key function holders is seen as being primarily the responsibility of the credit institution.
The Guidelines set out the criteria for the assessment of experience and reputation and documentation requirements for credit institutions. They also contain a notification requirement and require that in cases where a member of the management body is not suitable, the credit institution and, if necessary, the competent authority should take appropriate action.
What assessments should be performed
Credit institutions should assess the suitability of members of the management body in the following situations:
- when applying to be authorised as credit institution;
- when new members of the management body have to be notified to the competent authorities; and
- whenever appropriate, in relation to appointed members of the management body.
Credit institutions should identify key function holders and assess their suitability in line with the policy on the nomination and succession of individuals with key functions.
What should be taken into account
The assessment of the experience of members of the management body and key function holders should take into account the nature, scale and complexity of the business of the credit institution as well as the responsibilities of the position concerned; however being of good repute is a requirement for all such positions.
Where an issue casts doubt on the experience or good repute of a member of the management body or key function holder, the firm should assess how this will or might impinge on that person’s suitability. All matters relevant to and available for the assessment should be taken into account, regardless of where and when they occurred.
Credit institutions need to assess individual suitability while also ensuring that the overall the composition of the management body is sound. Each member of the management body needs to be suitable and must meet the requirements for his or her specific position (applying a principle of proportionality). In addition the management body in its management function and in its supervisory function or a unitary board needs to be collectively suitable.
When assessments should be performed
The suitability of members of the management body should, whenever possible, be done before the member takes up his or her position. If this is not possible, the assessment should be performed as soon as practicable to ensure that only suitable persons perform their duties, and in any event within 6 weeks.
The suitability of key function holders should be assessed by credit institutions before they are appointed, and re-assessed as appropriate (in general if a relevant event occurs).
The assessments and their results should be recorded.
- Good repute can be presumed if there is no evidence to suggest otherwise and no reason for doubt, taking into account all relevant information available for the assessment.
- Where personal or business conduct gives rise to any material doubt about his or her ability to ensure the sound and prudent management of the credit institution, a member of the management body should not be considered to be of good repute.
- Criminal or relevant administrative records should be taken into account, whilst considering all surrounding, including mitigating, circumstances and the relevance of the offence to the proposed role.
- The cumulative effects of more minor incidents which together may have a material impact should be considered.
Particular account should be taken of the following:
- conviction or prosecution of a criminal offence, in particular offences relating to business conduct
- relevant current or past investigations and/or enforcement actions relating to the member, or the imposition of fines for non-compliance with financial services legislation or regulatory rules
- relevant current or past investigations and/or enforcement actions by any other regulatory or professional bodies for non-compliance with any relevant provisions.
Attention should be paid to the following factors regarding the propriety of the member in past business dealings:
- evidence that the member has not been transparent, open, and cooperative in its dealings with supervisory or regulatory authorities;
- refusal of any registration, authorisation, membership, or license to carry out a trade, business, or profession; or revocation, withdrawal, or termination of such registration, authorisation, membership, or license; or expulsion by a regulatory or government body;
- the reasons for any dismissal from employment or any position of trust, fiduciary relationship, or similar situation, or having been asked to resign from employment in such a position; and
- disqualification by competent authority from acting as a person who directs the business.
The following should be considered in respect of past and present business performance and financial soundness of a member with regard to their potential impact on the member’s reputation:
- inclusion on the list of unreliable debtors or any negative records on such a list conducted by recognised credit bureau if available;
- financial and business performance of the entities owned or directed by the member, or in which the member had or has significant share, with special consideration to any rehabilitation, bankruptcy and winding-up proceedings and whether and how the member has contributed to the situation that lead to the proceedings;
- declaration of personal bankruptcy; and
- civil lawsuits, administrative or criminal proceedings, large investments or exposures and loans taken out, in so far they can have a significant impact on the financial soundness.
- Assessment of a member’s experience should consider both academic (theoretical) experience and practical experience gained in previous occupations.
- Particular consideration should be given to the level and profile of the education – academic qualifications in banking and finance, economics, law, administration, financial regulation and quantitative methods would generally be considered relevant to banking and financial services.
- Knowledge gained from previous occupations should be assessed in the light of the nature, scale and complexity of the business as well as the function performed within it
Areas to be considered include:
- financial markets;
- regulatory framework and requirements;
- strategic planning, and understanding of a credit institution’s business strategy or business plan and implementation thereof
- risk management (identifying, assessing, monitoring, controlling and mitigating the main types of risk of a credit institution, including the responsibilities of the member);
- assessing the effectiveness of a credit institution’s arrangements, creating effective governance, oversight and controls; and
- interpreting a credit institution’s financial information, identifying key issues based on this information and appropriate controls and measures.
- A member of the management body in its management function should have practical and professional experience from a managerial position over a sufficiently long period; although short term or temporary positions can be considered, they would not normally be sufficient to presume sufficient experience.
In assessing practical and professional experience gained from previous positions should be assessed, particular regard should be given to:
- length of service;
- nature and complexity of the business where the position was held, including its organisational structure;
- scope of competencies, decision making powers, and responsibilities;
- technical knowledge gained through the position about the business of a credit institution and understanding of risks credit institutions face;
- number of subordinates.
- A member of the management body in its supervisory function should have sufficient experience to enable him or her to provide constructive challenge to the decisions and effective oversight of the management function; and should be able to demonstrate that they have, or will be able to acquire, the technical knowledge necessary to enable them to understand the business of the credit institution and the risks that it faces sufficiently well.
In assessing the suitability of a member, the following should also be considered:
- potential conflicts of interest;
- the ability to commit sufficient time;
- the overall composition of the management body; and
- the collective knowledge and expertise required and members’ ability to perform their duties independently without undue influence from other persons.
The assessment of a member’s independence should include:
- past and present positions held in the credit institution or other firms;
- personal, professional or other economic relationships with the members of the management body in their management function, in the same credit institution, in its parent company or subsidiaries; and
- personal, professional or other economic relationships with the controlling shareholders of the same credit institutions, with its parent institution or subsidiaries.
The executive (management body in its management function) needs collectively to have sufficient practical experience in credit institutions.
Where firms have a nomination committee or equivalent, that committee should actively contribute to fulfilling the credit institution’s responsibility for adopting appropriate internal policies on the assessment of the suitability of members of the management body and key function holders.
The Guidelines set out key criteria expected to be covered in the policies of credit institutions.
- Policies for selecting and assessing members of the management body should take into account the nature, scale and complexity of the business of the credit institution, and consider the different experience needed for the specific management body positions (including positions necessary to comply with national laws on employee representatives). They should at least cover:
- the individual or function responsible for performing the suitability assessment;
- the applicable internal procedure for the assessment of the suitability of a member;
- the necessary competencies and skills of a member of the management body needed to assume that the member has sufficient expertise,
- the information and evidence that a member of the management body should provide to the credit institution for an assessment;
- if the member is to be appointed by the shareholders the measures taken to ensure that shareholders are informed about the requirements for the position and the relevant profile of persons before they are appointed; and
- the situations where a re-assessment of the suitability should be performed, together with measures to identify such situations. These should include a requirement that members of the management body should notify any material change to the credit institution and may include annual notifications of any changes affecting their compliance with the relevant requirements.
- ways in which the credit institution will provide training opportunities, in case there are specific learning and development needs of the members of its management body.
- Policies for the nomination and succession of individuals with key functions, and the assessment of their suitability should take into account the nature scale and complexity of the business of the credit institution and set out at least:
- the positions for which a suitability assessment is required;
- the individuals or function responsible for performing the suitability assessment; and
- the criteria for reputation and experience to be assessed for the specific position.
If the credit institution concludes that a person is not suitable to be appointed as a member of the management body, that person should not be appointed. If the member has already been appointed, the credit institution should take appropriate measures to replace this member unless appropriate measures can be (and are) taken to ensure the suitability of the member in a timely manner. If on re-assessment, the credit institution concludes that a member of the management body is no longer suitable, it should take appropriate measures to rectify the situation and inform the competent authority accordingly.
Appropriate measures must take into consideration the particular situation and shortcomings of the member and might include:
- adjusting responsibilities between members of the management body;
- replacing certain persons; and
- training single members or the whole of the management body to ensure that the collective qualification and experience of the management body is sufficient.
If a credit institution’s assessment concludes that a key function holder is not suitable, the credit institution should take appropriate measures.
Review of Guidelines
The EBA is mindful of the need to avoid inconsistencies between these guidelines and CRD IV, and is following the relevant negotiations with the aim to identify any inconsistencies. It proposes to review these Guidelines once the text of CRD IV is adopted.