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The ECB’s Fitness and Properness Test: The Assessment Process

September 2017 - Finance. Legal Developments by Chetcuti Cauchi Advocates.

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In May 2017, the European Central Bank ("ECB") published a list of guidelines which gave a compressive overview of the practices and procedures applied by it when assessing the suitability of members of the management bodies of Significant Institutions ("SIs") as well as trying to harmonize national rules of all Member States in relation to the fit and proper assessment. 

The ECB, as well as the National Competent Authorities (“NCA”), will need to conduct a fitness and property assessment on all members of the management bodies of SIs as well as Less Significant Institutions (“LSIs”) respectively.

To fulfil the requirements of the fitness and properness test, members of management bodies need to fulfil the following five criteria: experience, reputation, conflict of interest and independence of mind, time commitment and collective suitability.

This publication will provide a short overview of the assessment process undertaken by the ECB or the NCA when assessing members. It will also give an overview of what can trigger a fit and proper assessment and how decisions are taken.

1.1 Triggers

A fit and proper assessment can be triggered by:

  • A change in the management body due to a new a new appointment;
  • A change of role or a renewal;
  • New facts or any other issue; and
  • A licensing or qualifying holding procedure.

1.1 New appointments

1.1.1 Standard procedure

The standard process for the assessment of the suitability of new appointments is generally started by the supervised entity which is responsible for notifying the NCA of the proposed appointment of a new member of the management body in accordance with national law requirements. The NCA shall provide forms and templates. Subsequently, the ECB is informed by the NCA which will then conduct a joint assessment on the necessary documentation ensuring that:

  • The assessment is carried out with the criteria provided in the national law;
  • The requirements under European law are respected; and
  • The appointment is compliant with the fit and proper assessment.

The assessment should include:

  • Examination of the documents received;
  • Consultation of local registers;
  • Consultation of the EBA database on administrative sanctions;
  • Contact with other national authorities; and
  • Preparation of a decision for the approval of the supervisory board and adoption by the Governing Council.

1.1.2 Change in the management body

Renewals, changes of role or resignations all qualify as changes in the management body.

A fit and proper assessment shall only be carried out if required and prescribed by laws of the country in which the credit institution is established and supervised. In this case the supervised entity has to notify the NCA of the change and a decision will be taken by the ECB. On the other hand, if no decision is required by the national law the supervised entity will simply have to notify the NCA of such change.

With respect to renewals, appointees will be considered to be suitable if no new facts have arisen during the first period during which the appointee held such position, unless national law requires a full in-depth re-assessment of the five (5) fit and proper criteria.

Additionally, resignations also constitute a change in the management body, however, in this case, no decision will need to be taken. Nonetheless an exit interview might be held for the purpose of the ongoing supervision.

1.1.3 Licensing and qualifying holding procedures

When licensing a credit institution, the fit and proper assessment is carried out as part of the licensing procedure. The same applies for a qualifying holding procedure.

 

2.Decision

When a decision has been taken, formal feedback will be given after a complete and thorough fit and proper assessment. The final decision is approved by the Supervisory Board and adopted by the Governing Council. The ECB has the power to include recommendations, conditions or obligations in the event of a favourable decision being communicated to the applicant, as well as set out expectations in relation to issues that have been identified that have to be satisfied in the future. The use of such a non-binding instrument is different from the imposition of requirements on the supervised entity, which could lead to a negative response should the supervised entity be non-compliant.

The ECB may subject a supervised entity to one or more conditions only if:

·         it releases a negative decision in respect of a shortcoming which is easily solved;

·         the condition is well-defined and can be satisfied in a relatively short time-frame; and

 

·         the content of the condition satisfies the criteria established in the applicable national law.

The most common conditions include:

·  Undertaking requests to attend / undertake focused training;

·  Divestiture of an external directorship or other function;

·  Probationary period under the level of the management body.

A positive decision could also include an obligation to provide specific information for the purposes of the ongoing fit and proper assessment. Non-compliance with the condition will not automatically affect the fitness and propriety of the appointee.

The most common obligations which may be requested by the ECB are:

·         Reporting on pending legal proceedings;

·         Improvements required in written policies on conflict of interest; and

 

·         Improvements required in terms of collective suitability.

The appointee or the supervised entity can request a review of the decision by the Administrative Board of Review or to challenge the decision before the Court of Justice of the European Union.

If the regulatory decision given by the ECB could negatively affect the rights of the appointees or the supervised entity, some fundamental principles and rights shall be granted to the aforesaid, namely:

The ECB shall base its decision only on objections which the persons that are the subject of the proceedings are able to comment on;[1]

A party has the right to be heard;[2]

A party has the right to have legal representation, the right to access the ECB file as well as the right to a statement of reasons which led to the ECB’s decision.

For additional information about Banking & Finance and Financial Services, we kindly invite you to read the following:

Banking

Fintech

Banking Prudent Conduct Requirements under Maltese Law

Banking Institutions in Malta

Banking Rules/Directives

2018 EU-wide Stress Test Draft Methodology

About the Authors:

Dr Maria Chetcuti Cauchi

B.A., LL.M.(Warwick), LL.D., TEP

Chetcuti Cauchi Advocates
Legal | Tax | Corporate

Co-founding partner, Maria is the partner in charge of the Financial Services of the Firm.

On a day to day basis, Maria’s team advises an array of clients on regulatory issues, compliance matters, commercial and financial transactions and corporate governance issues in general. Maria has vast experience of start-ups, corporate restructurings, takeovers, mergers, privatisations, and equity and debt financing structures. Maria’s team regularly handholds banks and financial services companies on the procedure to set up in Malta, the compliance and regulatory aspects of their business including client intake and due diligence, ongoing compliance procedures, reporting and general regulatory observance matters.

Maria’s pet subject centres around the application of traditional notions of Intellectual Property and Financial Services Law to the online world, as well as the conversion of brick and mortar notions to cyberspace. These mostly include projects with a fusion of technology law and investment/finance law, such as payment gateways, gaming operations, e-money institutions and ICT online operators.

Mr Nicholas Warren

MBA, BCom(Hons) Banking & Finance

Senior Manager, Financial Services

Nicholas graduated from the University of Malta in 2004 in the field of Banking & Finance. He obtained his ACCA qualification in 2009 and also obtained a Diploma in Islamic Finance from CIMA. He is currently reading for a Master’s Degree in Strategic Planning from the Herriot Watt Edinburgh University. Within Chetcuti Cauchi, Nicholas acts as Senior Manager to the corporate and accounting department whilst also lending advisory expertise to the financial services regulatory team.

Contact us on:

www.ccmalta.com

info@ccmalta.com

[1] Art 22 SSM Regulation

[2] Art 31 SSM Framework Regulation. The hearing shall be based on the draft decision. The draft decision is revised on the basis of the assessment of the hearing.