New guidelines on assessing the suitability of members of the management body of credit institutions and investment firms

Spotlight
15 December 2017

On 26 September 2017, the European Securities and Market Authority (ESMA) and the European Banking Authority (EBA) published joint guidelines on the assessment of the suitability of members of the management body and key function holders of credit institutions and investment firms. These guidelines aim at further harmonising internal governance arrangements, processes and mechanisms within these institutions and firms in the European Union and ensuring sound governance arrangements. The new guidelines will enter into force on 30 June 2018 and will then replace the EBA guidelines of 22 November 2012. However, some transitional provisions apply before 30 June 2018. 


Background

In the aftermath of the financial crisis, the European regulator implemented important changes regarding corporate governance in the financial sector, inter alia through the adoption of the CRD IV Directive (Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013) and the MiFID II Directive (Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014). In this way, the EU aimed to remedy the actual or perceived shortcomings regarding corporate governance that could have contributed to the financial crisis. Particular attention was paid to strengthening the role and responsibilities of management bodies in credit institutions and investment firms, in order to protect the integrity of the market and the interests of the consumer.

The CRD IV and MiFID Directives imposed specific requirements regarding the composition and functioning of the management body and the qualification of its members. Both directives instructed the EBA and the ESMA to adopt guidelines to clarify certain concepts in this respect.

Content of the guidelines

Based on these instructions, the EBA and ESMA joint guidelines specify (i) the concept of sufficient time commitment by a member of the management body for the performance of his/her function, (ii) the concept of adequate individual and collective knowledge, skills and experience of the members of the management body, and (iii) the honesty, integrity and independence of mind which the members of the management body must possess.

In addition, the guidelines provide further details regarding the human and financial resources which credit institutions and investment firms must devote to the induction and training of members of the management body. They also offer pointers regarding the diversity policy to be applied by credit institutions and investment firms when selecting members of the management body.

Finally, the guidelines indicate the assessment of the suitability of the members to be carried out by the credit institutions and investment firms, as well as by the competent authorities.

To consult the full guidelines, click here. 

An important practical manual

The guidelines offer welcome clarifications of a number of concepts which, without further explanation, remained rather vague. The guidelines will undoubtedly provide credit institutions and investment firms with important practical guidance for assessing the suitability of the individual members, as well as the overall composition of their management bodies. For example, a template matrix to assess the collective suitability of the members of the management body, a list of skills and a list of documents that must be available at the time of the first appointment are appended to the guidelines. Also of interest is the benchmarking carried out by the EBA regarding the number of directorships, the time commitment and the training of directors.

Although the designation of the new rules as "guidelines" is technically correct, it can nevertheless be somewhat misleading. In themselves, they contain "only" guiding principles, which do not take precedence over Belgian law. Nevertheless, the guidelines state that the competent authorities should ensure compliance with these new rules by the institutions and firms that fall within the scope of the guidelines. Moreover, the supervisory authority and the institutions and companies should do everything in their power to comply with the guidelines. If a supervisory authority decides not to enforce compliance with (all of) the guidelines, they must inform the EBA and ESMA respectively. It is clear that the guidelines will be more than mere "soft law".

Entry into force

The guidelines enter into force on 30 June 2018. Before that date, however, some transitional provisions apply. For example, credit institutions and investment firms must apply these guidelines when appointing new members of the management bodies and at the latest when conducting their annual reassessment of the suitability of the directors and members of the management committee.