Dear prospective director, are you suitable for the job?

Dear prospective director, are you suitable for the job?

New regulation, which introduces a suitability assessment for executive and supervisory directors of financial institutions, will take effect from 1 July. This replaces the current policy rule on expertise knowledge. A potato – potahto replacement or more?

A new statute on the introduction of a suitability assessment for executive and supervisory directors of financial institutions, will come into force on 1 July 2012. This new legislation alters current policy rules pertaining to expert knowledge of the aforementioned executives, which stipulate the level of expertise that has to be in place in order for financial institutions to gain market access and to retain licenses, and introduces consecutive suitability assessments for the supervisory directors of these institutions.

The expertise level of managing executives and supervisory directors has come under scrutiny since the emergence of the credit crisis. Various (parliamentary) committees, such as De Wit and Scheltema, considered it to be appropriate to modify current assessment frameworks, as these frameworks were primarily focused on the individual expert knowledge of an executive or supervisory director without regard to the composition and functioning of the corporate organs as a whole. The Advisory Committee on the Future of Banks, the Maas Committee, also proposed other assessment frameworks with respect to the board composition of banks. In short, the whole must become greater than the sum of its parts.

The new regulation therefore replaces the current expertise assessment with a suitability assessment. The Explanatory Memorandum states that a prospective executive or supervisory director should not only have a certain level of expertise in finance, but he or she should, for instance, also not hold too many additional positions and have enough time to fulfill his or her tasks. If a person can satisfy all these requirements, he or she will be regarded as suitable.

Another element of the statute is the enhancement of cooperation between the two financial supervisory authorities in the Netherlands, the Authority for the Financial Markets (AFM), which performs market conduct supervision, and the Dutch Central Bank (DNB), which performs prudential supervision. These authorities now have to cooperate in order to perform suitability assessments, as these assessments entail both market conduct and prudential elements. In the new system, both supervisory authorities have to agree on the appointment of a director, whereas currently this was the sole competence of the original licensing authority. Under the current system, a bank that would like to appoint a new supervisory director only needs the approval of the DNB. In the new system, both authorities need to approve this new director and the disapproval of one of the authorities is guiding instead of the decision of the original licensing authority.

The question remains if the new assessment framework really alters the current situation or is it just a potato-potahto replacement. In my opinion, perhaps it is neither. Current executive and supervisory directors will probably be just as suitable as they were considered to be experts. Otherwise it is not just a replacement of words, but of perspective. The new legislation focuses on the composition and functioning of the board as a whole instead of individual expertise and this paradigmatic change might precisely attribute to a better functioning of financial institutions as all board members, executive and supervisory, will be experts that are also suitable for the job.


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