Selwyn Blair-Ford, Head of Global Regulatory Policy, Wolters Kluwer Financial Services
European banks are to comply with new European Banking Authority (EBA) guidelines related to the assessment of the members the management body and key function holders from the 22nd May 2013. The guidelines were originally published on the 22nd November 2012, and banks and regulators were given 6 months to have the new regime in place.
The new guidelines set out the process, criteria and minimum requirements firms will use when assessing whether a candidate is suitable to appoint. Weaknesses in corporate governance, inadequate oversight and lack of challenge for the supervisory function are all factors deemed to have contributed to banks taking excessive risks which consequently contributed to systemic problems. As a result the Capital Requirements Directive amendment IV (CRDIV) not only supports the introduction of these guidelines, but also requires that firms publicly disclose their corporate governance arrangements.
The introduction of new governance guidelines has been the focus of national regulators up to now. For example, the UK has implemented new criteria of the approval of controlled functions, and new laws pertaining to the conduct of senior management in Germany. Governance has also been a key issue in the international arena. The September 2012 paper from the Basel Committee on Banking Supervision entitled “Core Principles for Effective Banking Supervision” which contained 29 principles that the 27 jurisdictions that make up the Basel Committee would expect to see in an effective banking supervisory process. Prominent amongst these was principle 14, Corporate Governance. Essential criteria under this principle include:
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- Establishing a legal framework to establish the responsibilities of a bank’s board and senior management;
- Regular assessment of governance policies;
- Ensuring board members are effectively exercising their duty of care; and
- Confirming that governance structures and processes for nominating board members are appropriate and commensurate with its risk profile.
The EBA guidelines are for members of both the management body and the supervisory body of a credit institution. The guidelines also pertain to key function holders who are not members of the management or supervisory bodies. The comments below apply to both management supervisory and key function holders.
Credit institutions and competent assessment of the suitability of a member of the management body processes are triggered when:
- A credit institution is applying to be authorized;
- When new members of the management body have to be notified to the competent authorities;
- Whenever appropriate.
The assessment should identify key function holders and their suitability. It is primarily the credit institution’s responsibility to perform the initial and on-going assessments.
Credit institutions’ assessment methodology for the management body and key functions must take the scale, nature and complexity of the business into account. It must also include the level of experience and expertise the role will require. Credit institutions may also include tailored training programs to take any gaps in knowledge into account.
The management body should have an up-to-date understanding of the business of the institution, commensurate with their responsibilities, including appropriate area for which they are not directly responsible.
The management body will need to regularly assess individual and collective efficiency and effectiveness of its activities, governance practices and procedures. Firms should consider the creation of specialized committees such as audit, risk, remuneration and others where appropriate. The management body will also promote high corporate, ethical and professional standards.
The results of such assessments need to be recorded, and should be available for review by the appropriate external authorities. Credit institutions are required under the guidelines to have written policies on suitability and should include items such as individual responsible for assessment, information to be provided to the assessing body, ensuring all relevant parties involved in the assessment are adequately informed in a timely manner.
The EBA has focused on improving firms’ governance structures. It will be true that many financial institutions will already feel that they have much of what is required in place. However looking at this and related requirements the number of criteria that European banks have to satisfy means this is not a task to be taken lightly. Firms not only have to take on the requirement to correctly assess, but also to periodically review and to keep the required knowledge updated.
The Board, management and key function holders are required to have correct up-to-date information relating to the business performance. All these informational and training requirements are unlikely to be addressed fully without proper consideration of what information is needed when and by whom throughout the firm. Once this has been done the firm then needs to ensure that their internal reporting process delivers the required information.
The significance of this paper is throughout all of Europe there is now a common standard measure the appropriateness of existing processes. It will be best for all if – when tested – the existing processes are not found lacking.