Governance Under CRD VI: Harmonized EU Requirements
In Short
The Situation: Prior to the enactment of Capital Requirements Directive ("CRD") VI, corporate governance rules for the financial services industry were not harmonized across EU Member States.
The Result: EU institutions will now need to adjust to some new requirements for management and governance due to CRD VI, which mainly adopts fit and proper rules of the existing European Banking Authority ("EBA") guidance. This represents a change for many countries, especially those with previously less prescriptive rules.
Looking Ahead: With the additional guidelines, long-term strategic planning related to the hiring and training of management personnel is becoming even more important, especially once Member States have issued their implementing laws.
Interplay of Frameworks
Before CRD VI, there was limited EU harmonization of the requirements for the appropriate qualifications of corporate managers. CRD V placed the primary responsibility on the financial institutions themselves for assessing compliance with the respective provisions of individual Member States. In addition, the criteria for assessing the suitability of managers differed among local regimes throughout Member States.
CRD VI offers a course correction, harmonizing the various qualification criteria into EU-wide requirements for the corporate management body, incorporating existing EBA guidance on fit and proper requirements. While local laws in some Member States already meet those rules, others will require significant changes.
The "management body" is now defined broadly, including all the persons who effectively direct the business, supplemented by the (already existing) definition of the "management body in its supervisory function" overseeing management decision-making.
"Persons who effectively direct the business" are not only the management board but also the CEO, the members of the executive committees, and the general manager or other senior managers who take responsibility for the executive management of the bank, even if they are not part of the board. The management body is therefore sometimes broader than the governance body or bodies under national law, and always includes the persons who direct the business (e.g., the CEO, the executive committee, the general manager, other senior managers) in cases where they are not part of the governance body or bodies appointed by shareholders.
Assessing and Ensuring Suitability
Article 91 CRD VI sets new standards for the appointment of managers. It implements additional duties for the induction and performance of functions of the management body, while noncompliance allows the authorities to remove managers.
Each manager must not only be equipped with sufficient skills and experience but also with reputation, honesty, and integrity. This takes into account any relevant criminal or administrative records but is not limited to these.
The institution and its supervisors need to assess (or reassess) the suitability of members of the managing body, especially when any new facts or other circumstances that could affect the suitability of management body members become known. The institution must inform the competent authority of these developments without undue delay.
Beginning with recruiting and induction of management members, the management body is required to contain a broad set of qualifications and to possess a policy promoting diversity within the management body.
The composition of the management body should reflect the knowledge, skills, and experience necessary to fulfil its responsibilities. All newly appointed members of the management body must receive key information for a clear understanding of the institution's structure, business model, and risk profile, including ESG factors. They should maintain and deepen the knowledge and skills needed to fulfil their responsibilities, while keeping any policies and procedures up to date and adjusted according to external factors.
The rules further focus on the ongoing performance of the managers:
- Members of the managing body must commit sufficient time to executing their duties and responsibilities, including understanding the business, risks, and strategies. The prescribed time varies depending on the circumstances of their tasks and the institution.
- The total number of directorships (excluding those that are not predominantly commercial ones) held by an individual manager is limited.
- Institutions should ensure that managers have adequate knowledge, skill, and experience appropriate to their responsibilities and division, not only at the appointment stage but also on an ongoing basis.
Article 91a CRD VI also sets out governance requirements for other key function holders of companies who have major influence over a company without necessarily being part of the management body. The provisions for CFOs and leaders of the internal control functions are in many ways identical to those of Article 91. The requirements for other key function holders do not require Member States to empower authorities to continuously assess and, possibly, remove these persons from their office.
Three Key Takeaways
- Harmonized requirements include a proper composition of the management board, training, and further education of managers, as well as qualitative and quantitative requirements for the performance of their functions. Institutions need to (re-)assess managers' suitability regularly and in the case of material changes.
- Where managers do not fulfil the requirements, competent authorities will have the power to remove them to ensure the solidity of the financial institution.
- These changes will have the greatest impact on countries with less prescriptive fit and proper rules, whereas other Member States and companies within them may only have to adjust details in their current governance rules.
