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ECB publishes new guide to fit and proper assessment of bank managers

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Behrens Alexander
Dr Alexander Behrens

Partner

Frankfurt am Main

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Lisa Huber

Regulatory Practice Prof.

Frankfurt am Main

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18 February 2022

The ECB has published a revised and more comprehensive Guide to fit and proper assessments, together with an updated fit and proper questionnaire. The new version replaces the previous Guide (from 2018) and questionnaire (from 2016) following the outcome of a public consultation. The new guide presents a next step in the ECB’s stricter and more intrusive approach to fit and proper assessments and its efforts to improve governance of banks. 

In line with this more stringent approach, the new guide (the Guide) aims at enhancing the fit and proper (F&P) assessment and increasing its transparency and efficiency. The ECB makes clear that its Guide is not legally binding or replacing national law. It is however fully embedded in the Single Rulebook and in line with the joint ESMA and EBA Guidelines on suitability and the EBA’s Guideline on internal governance. The ECB has openly avowed to continue to push for fully harmonised and directly applicable fit and proper criteria. 

In particular, the Guide contains additions in four key areas:

  1. Ex ante approach to applications
  2. Reassessment policy
  3. Individual accountability
  4. Supervisory expectations on collective suitability with regard to climate risks and gender diversity

Additionally, the Guide and the updated questionnaire (the Questionnaire) seek to increase clarity as to the information to be provided in F&P applications to streamline the process and increase harmonisation across the Single Supervisory Mechanism (SSM).

General approach

The ECB sees itself as a gatekeeper of banks' management, whose appointments remain the prime responsibility of the institutions themselves. The ECB also takes a behavioural point of view on F&P and continues to insist that, collectively, the board should reflect proper expertise and the ability to challenge proposed decisions with independence of mind.

Ex Ante assessment

While the ECB is responsible for the F&P assessments regarding members of the management body of significant banks, the application process and its timing are subject to national law. In eight out of the 21 Member States participating in the SSM, the application needs to be submitted before appointment (ex ante) and in the 13 others only after appointment (ex post).

In order to promote harmonisation and consistency across the EU and to avoid possible reputational risks for individuals and institutions, the ECB now invites certain banks to front load certain applications notwithstanding national law provisions. 

After the submission, an appointee can either be deemed fit and proper or be rejected, while the ECB may issue recommendations, conditions and/or obligations in the case of a positive decision. If the ECB comes to an unfavourable decision, the parties concerned have a right to be heard.

In the interests of proportionality, only the following institutions are asked to submit the Questionnaire and CV of the appointee to the ECB as soon as there is an intention to appoint (eg after the proposal from the nomination committee):

  • The institution is: (a) the entity at the highest level of consolidation of a significant group or (if different) the entity with the largest value of assets in that group; or (b) a stand-alone significant institution; and
  • The proposed appointment is for the position of CEO and/or executive member of the management body.

Reassessment policy

The ECB has significantly bolstered its guidance on the reassessment process and the circumstances that may prompt it.

A reassessment is triggered by the emergence of new facts, ie those not known to the competent authorities at the time of assessment that have an impact on the suitability of a member of the management body. The ECB notes that reassessments are usually an exceptional course of action for severe situations and do not constitute an administrative sanction. 

New to the Guide are:

  1. Inclusion of a non-exhaustive list of facts that are likely to trigger reassessment.
  2. Clarification of the ECB’s reassessment process that is divided into three phases: (a) pre-screening phase involving the assessment of the evidence and potential impact of new information; (b) step 1 reassessment involving a prudential assessment of the materiality and severity of the new facts; and (c) step 2 reassessment involving the adoption of an ECB decision which may, in extreme cases, lead to the removal of the individual.
  3. Clarification that ongoing proceedings may already trigger a reassessment where such proceedings relate to material facts for which a direct responsibility can already be established, or where the facts are deemed to be sufficiently well established, even if an appeal is pending.
  4. Clarification that new facts relating to anti-money laundering (AML) compliance will always trigger a reassessment where the suitability of a board member or key function holder is concerned.
  5. Introduction of a decision wheel that will guide the materiality and severity assessment of new facts with regard to reputation and skills, knowledge and experience.

On 16 February 2022 the ECB disclosed in its latest Supervisory Newsletter that in 2021 it had conducted 17 reassessments of bank managers across the Eurozone. None of these reassessments resulted in a removal, but eight mangers chose to resign from their post before completion of the procedure. The new facts leading to reassessments related to different areas of concern, including the AML framework, criminal and civil proceedings and bankruptcy.

Notably, only five reassessments were triggered by banks notifying their supervisors of the new facts. In the other 12 cases, the ECB or NCA learned about these from other sources, eg through ongoing supervision or the media. The ECB reminded banks of their obligation under the SSM Framework Regulation to notify the ECB or relevant NCA of new facts calling into question a managers' suitability and stressed that a failure to do so could lead to supervisory sanctions.

Individual accountability

The Guide includes a new section which clarifies that findings identified by a supervisor as recent, relevant and severe against an institution where the appointee has or had a position may impact an appointee’s suitability, even when the appointee had no direct connection to the findings. This is so because the appointee may still be held individually accountable for the collective failing. Findings (that can be supervisory, regulatory or judicial in nature) from a variety of bodies or authorities may be considered, including findings from competent judicial or prosecution authorities and tax, competition or data protection authorities.

The outcome of an assessment of individual accountability may affect an appointee’s suitability in the areas of: (a) reputation; (b) independence of mind; and (c) experience, and may in some cases lead to a negative outcome of the F&P assessment or a positive decision subject to ancillary provisions or conditions. When conducting a detailed assessment of the relevant facts with regard to individual responsibility, factors like the awareness or the roles and responsibilities of the appointee are taken into account.

The new approach to individual accountability will be applied if all of the following are true:

  • The appointee is or was a member of the management board of: (a) a credit institution including subsidiaries, EEA branches and holding companies; or (b) a regulated financial sector entity, at the time when the facts underlying the findings occurred;
  • The appointment sought by the appointee is the role of chair, CEO and/or executive director at one of the top entities of significant institutions or a supervised entity with total assets above EUR 30 billion; and
  • The findings in question are recent, relevant and severe.

Updates on collective suitability: climate risk expertise and diversity

Against the background of the ECB Guide on climate-related and environmental risks (published in 2020), the ECB has added language on collective suitability and individual experience in this field. Appropriate understanding and expertise as regards climate-related and environmental risks now factors into the F&P assessment at the individual as well as at the collective level as these are considered as sources of significant financial risk. The board is expected to have adequate collective knowledge, skills and experience in this area of risk.

As regards diversity, the ECB is stepping up its approach in line with CRD requirements on the diversity of management bodies, including the requirement to prepare a recruitment policy with gender diversity targets and national legislation in that area. Besides gender diversity, the ECB further encourages diversity with regard to education, professional background, geographical provenance and age. Where national law requires fixed gender quotas or hiring to be in line with internal policies, the ECB will make recommendations or impose an obligation in the F&P decision to respect those rules in current or upcoming appointments.

Updated Questionnaire

The Questionnaire published simultaneously with the Guide responds to industry requests for simplification and a more streamlined process. It has been significantly adapted following the public consultation, with one in three of the grouped comments received by the ECB resulting in an amendment to the Questionnaire.

Certain non-crucial questions have been deleted while other areas have been enhanced to obtain more complete information and avoid further information requests down the line. The Questionnaire also establishes a common core for all SSM countries and, as far as possible, limits national specificities to create a level playing field and will be integrated into the digital IMAS portal to further streamline the process and increase efficiency.

Feedback to the draft guide

The ECB received feedback on the draft guide for 121 grouped answers; nine have led to amendments to the draft guide. The market participants’ main areas of criticism related to the topics of experience, reputation, conflicts of interest and independence of mind.

While many respondents felt that the experience criteria were too rigid, the ECB was at pains to emphasise that the assessment was on a case-by-case basis and the fact that an appointee did not meet the experience presumption would not mean they would be regarded as unsuitable. 

As regards reputation, the ECB’s position to take into account ongoing proceedings generated a lot of opposition from the industry. The ECB stood its ground, but accepted the request to introduce a limited timeframe of five years during which decisions or findings are considered relevant (unless there are aggravating factors). However, no time limit was imposed on the disclosure obligation.

The ECB did not accept the push back as regards a rather extensive list of personal relationships potentially giving rise to conflicts of interest. It maintained the position that such information needed to be disclosed but accepted data protection and privacy concerns regarding the gathering of comprehensive financial information on the appointee and their family to assess a financial conflict of interest. 

Outlook

The Guide presents a significant step in making the stricter and more intrusive approach of the ECB as regards F&P assessments more transparent and in increasing the predictability of its decisions. The firmer stance has already been felt in the recent past, where the number of assessments in which the ECB identified one or more concerns rose significantly. The ECB expressed concerns for roughly half of all proposed appointees. Further, a significantly higher number of applications were withdrawn to prevent a negative decision.

The updates to the Questionnaire will help ease some of the burden on institutions in providing a more streamlined and uniform process and reduce the frequency of information requests from the ECB, hopefully speeding up the process.

Further Reading

Read the ECB guide to fit and proper assessment here.

See the fit and proper questionnaire here. 

The joint ESMA and EBA Guidelines on suitability can be found here.

Read more on the ECB's recent statements on reassessments here.