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Changes in the procedure for suitability and integrity screening by financial institutions' policymakers

Due to criticism from the market regarding the suitability and integrity screening of proposed management board and supervisory board members of financial institutions, the Dutch Central Bank (De Nederlandsche Bank, DNB) announced at the end of 2015 that it would improve the screening process. The Netherlands Authority for Financial Markets (Autoriteit Financiële Markten, AFM) has also strengthened its screening process. The changes made by DNB and the AFM do not relate to the legal requirements applicable to the screening, but they are improvements to the current procedure.

Requirement for screening

Under the Dutch Financial Supervision Act, a proposed management board member or supervisory board member of a financial institution (eg a bank, investment firm, insurance company or pension fund), must be suitable for their position and their integrity must be beyond doubt1. Similar requirements can be found in European laws governing financial institutions, such as CRD IV, MiFID and Solvency II. Suitability and integrity screening is done in the Netherlands by DNB or the AFM, depending on which regulator is the primary regulator of the relevant financial institution.

Suitability

For the suitability screening of a proposed management or supervisory board member, the relevant regulator assesses whether a nominee displays the relevant and appropriate knowledge, skills and professional behaviour to perform the job. Education, work experience and competences of the nominee are considered for this purpose. The suitability assessment is position specific. This means that the suitability requirements depend on the specific position sought by the nominee, the nature, size, complexity and the risk profile of the institution and the composition and functioning of the management or supervisory board2. A new management or supervisory board member cannot be appointed before he or she has successfully passed the screening. If a person who has been screened for one position then seeks to change position, a new suitability test is required (if the new position also requires suitability screening).

Integrity

For integrity screening, the relevant regulator will assess whether there are facts or circumstances which show behaviour that is not in line with the integrity required for the position to be held by the person. This extends, for example, to criminal, financial, supervisory and tax history. The relevant regulator will also carry out background checks. If the person's integrity has been assessed before, by either DNB or the AFM, no new assessment will be carried out, unless a change in the relevant facts or circumstances gives reasonable cause for a reassessment.

Screening statistics

In 2014 and 2015, DNB screened 1,737 and 1,949 persons, respectively; 10% in 2014 and 4% in 2015 of these persons did not pass the screening or withdrew their application. The AFM conducted 1,516 and 1,552 screenings in 2014 and 2015, respectively; 5% in 2014 and 4% in 2015 of these persons did not pass the screening or withdrew their application.

Self-screening of second tier officers

Since 1 April 2015, all second tier senior officers of banks or insurance companies who report directly to the management board and who are responsible for activities with a potentially material impact on the institution's risk profile are screened for suitability and integrity by DNB.3   This target group will differ per institution and will not always include all managers reporting directly to the management board. DNB notes on its website that the target group for the screening does not necessarily coincide exactly with the senior officers classified as identified staff under the Regulation on Sound Remuneration Policies (Regeling beheerst beloningsbeleid Wft 2014). The target group includes, among others, the following persons: superiors of the individuals authorised to enter into financial obligations in the financial markets on behalf of and for the account of the institution; managers in the compliance, risk and audit functions; managers that bear ultimate responsibility for legal affairs; and, managers that bear ultimate responsibility for recruitment policies for risk sensitive positions in the target group. For the second-tier senior officers, the suitability screening is done by the banks and insurance companies themselves with a possible check of the screening procedure and sample screening by DNB. The integrity screening is also mainly done by the financial institution itself based on public sources. The non-public sources are checked by DNB.

Criticism of existing regime – insufficient legal protection

The feedback received by the DNB indicated that the screening process was not always clear to the nominees. In particular, legal protection for nominees was not sufficiently clear. Many also felt that the legal protection for the nominees, or managing or supervisory board members being re-screened, did not sufficiently take into account the personal consequences of being found by a regulator not to be suitable for the position or having their integrity found to be insufficient.

New approach

Based on this criticism, DNB has significantly increased the information available on its website regarding the screening process, including information on how to prepare for a screening interview, a step-by-step guide for the screening and information on the objection and appeal possibilities. DNB has held information seminars on the screening process for financial institutions and other interested parties. A pilot project has been started in which screening interviews are recorded (by consent). Nominees are now allowed to take a representative (eg external legal counsel) to an interview. DNB has furthermore changed its internal procedures by having external experts and the senior management of DNB involved in the screening.

The AFM has also made some changes to its screening procedures in order to strengthen them. The AFM has stated that its screening procedures have become, in some cases, more elaborate. The discussions with referees are more extensive than previously and screening interviews take place more frequently.

External Evaluation Committee to screen the screening

The AFM and DNB have appointed an external evaluation committee to evaluate the screening process and the recent changes. A key question for the evaluation committee is whether the current screening process and the methods used by the AFM and DNB comply with their statutory duties. A report is expected by the end of 2016.

Footnotes

1. Arts. 3:8 and 3:9 of the Dutch Financial Supervision Act (Wet op het financieel toezicht, Wft) for financial institutions falling under the supervision of DNB and arts. 4:9 and 4:10 Wft for financial institutions falling under the supervision of the AFM.
2. See Suitability Policy Rule 2012 (Beleidsregel geschiktheid 2012).
3. Arts. 3:8 and 3:9 Wft. Arts. 3:8 and 3:9 Wft.

Legal and Regulatory Risk Note
Europe