The final European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) joint Guidelines to assess the suitability of Board members and key function holders were published in March and will apply from 30 June 2018. The EBA guidelines on internal governance (GL 44) of 27 September 2011 are repealed with effect from 30 June 2018.
These Guidelines apply to all CRD and MiFID firms, with CRD firms also having to assess all key function holders who play a significant role in the overall operations, who are not direct members of the Board (e.g. heads of internal control functions and CFOs).
Suitability assessments on an individual basis for Board members and collective basis for the Board are foreseen. Such assessments are required for new appointments, authorisations or when material changes occur.
The Guidelines set out harmonised criteria for institutions to consider whether members of their management body and key function holders, (executive function holders, heads of internal controls and CFOs), have the knowledge, qualification and skills necessary to safeguard proper and prudent management of the institution. The Guidelines also intend to foster more diversity.
Key Guideline Requirements;
- ensuring sufficient time commitment of a Board member to perform his or her functions and responsibilities. Monitoring and keeping a record of member’s time commitments is recommended;
- adequate collective knowledge, skills and experience. This should consider practical and professional experience gained in previous positions of management over a sufficiently long period, scope of competencies, decision-making powers and the nature and complexity of the institution as well as a clear understanding of the institutions governance arrangements;
- honesty, integrity and independence of mind;
- adequate human and financial resources for induction and training of members of the management body to ensure their clear understanding of the institutions structure, business model, risk profile, and governance arrangements; and
- Diversity should be included in the selection process.
The Guidelines give good detail on how to assess adequate knowledge, skills and experience and elaborate on concepts such as the notion of ‘independence of mind’. Institutions also need to develop a policy for the assessment of suitability of members.
Interesting recommendations on how institutions should undertake collective suitability assessments are also included in the Guidelines.
Much of the detail from the Central Banks fitness & probity regime overlaps with the Guidelines albeit that the latter is more prescriptive. However, firms need to undertake a comprehensive gap analysis to get assurance of full compliance.
Given the supervisory focus on governance, it seems inevitable that this topic will feature as part of on-site inspections in the near future.
For further questions or to find out how we can support you in dealing with the new Guidelines, contact our Financial Services Advisory team and Prudential Risk experts.