On 26 September 2017, EBA and ESMA published joint Guidelines on assessing the suitability of members of management bodies and key function holders.
The primary aim of the Guidelines (PDF 1.19 MB) is to harmonise and improve suitability assessments and to ensure sound governance arrangements in credit institutions and investment firms, in line with the Capital Requirements Directive (CRD IV) and the Markets in Financial Instruments Directive (MiFID II). They seek to address the concern that corporate governance weaknesses contributed to excessive risk-taking, resulting in the failure of individual institutions and systemic implications.
The Guidelines aim to establish common criteria for the assessment of the suitability of Board members and key function holders and to ensure sound assessment processes as part of firms' governance arrangements. The criteria are:
Members of the management body must commit sufficient time to performing their functions, including consideration of the number of Directorships held.
Individually, all management body members and key function holders should have sufficient knowledge, skills and experience to fulfil their positions. Collectively, the management body must possess adequate competencies and qualifications to understand the firm's activities, including the main risks, and keeping such up-to-date. Firms are primarily responsible for ensuring that members of the management body fulfil the suitability criteria defined in the Guidelines on an ongoing basis and are required to establish appropriate policies and procedures.
Individuals should be of good repute, regardless of the nature, scale and complexity of the firm and their specific position within it. They should be able to demonstrate independence of mind in effectively assessing, challenging, overseeing and monitoring management decision-making.
Firms need to dedicate sufficient resources to the induction and training of members of the management body. The induction process should make new members familiar with the specificities of the firm's structure, its group structure, and business and risk strategies. Ongoing training should refresh and improve individuals' qualifications, so that the management body collectively meets or exceeds the performance levels expected. Training should cover changes in the relevant legal and regulatory requirements, markets and products, and the firm's structure, business model and risk profiles.
Diversity of management bodies is important: “a more diverse management body, in its supervisory and management functions, can reduce the phenomenon of `group think' and facilitate independent opinions and constructive challenging in the process of decision making”.
The Guidelines apply to all CRD and MiFID firms, irrespective of their governance structures (unitary board, dual board or other structure).f CRD firms also have to assess all key function holders that have a significant influence over the direction of the firm under the overall responsibility of the management body. Additional guidance is provided on the scope and process of assessments to be made by firms and national competent authorities, and related policies. Heads of internal control functions and the Chief Financial Officer, when they are not members of the management body, should always be considered as key function holders.
What it means for firms
Firms should consider the significance of these Guidelines for their governance arrangements and make all necessary preparations to comply with the Guidelines and supervisory expectations by 30 June 2018, when the existing EBA Guidelines, published on 22 November 2012, will be repealed.