Summary

Fit and proper testing in the Dutch financial sector

A view from both the Dutch and European legal perspective

The subject of this thesis is fit and proper testing in the Dutch financial sector. It follows from the “lessons” from and after the financial crisis that robust governance arrangements and suitable board members are of crucial importance for safeguarding the financial soundness and integrity of these institutions, public confidence in the financial sector and the stability of the financial system. Against this backdrop, the regulatory frameworks for fit and proper tests in the Netherlands and in Europe have been considerably extended over the last decade and the requirements in terms of integrity, suitability and reputation have been tightened. Dutch supervisors have intensified their supervisory processes. The increased activities of the ESAs and the introduction of the ECB as the European banking supervisor have brought the subject further to the fore.

The study focuses on the legal bottlenecks and dilemmas embedded in the system of fit and proper testing, viewed from both the Dutch and European legal perspective. The central question is what legal problems exist and where improvements can be made.

To answer this question, legislation and guidelines at both the Dutch and the European level were mapped out, subdivided by sector, persons to be tested (‘target group’), set requirements and responsible supervisor, schematically shown in Table 2.1 and Table 3.1. It is a broad, cross- sectoral analysis, covering inter alia banks, investment firms, (re)insurers, pension funds, premium pension institutions, trust offices, credit unions, credit rating agencies, AIFs and UCITS, central counterparties, trade repositories, securitisation repositories, market operators, data reporting service providers, central securities depositories, clearing houses, exchange bureaux, payment institutions, electronic money institutions and crypto-money service providers.

Also, regulatory supervision and enforcement by the supervisory authorities were examined. Aspects include the cooperation between AFM, DNB and the ECB, the (re)assessment process, supervisory measures and sanctions. Specific attention has been paid to the legal safeguards surrounding the (re)assessment process and the possibilities for legal protection. Finally, it has been examined to what extent the Dutch fit and proper tests overlap with Dutch banking disciplinary law.

The study identifies several legal difficulties and dilemmas. Issues of concern include aspects of legal certainty and legal equality. The use of open standards and the supervisory authorities’ discretionary powers may put pressure on these legal principles. At the same time, given the nature of fit and proper tests, flexibility in legal provisions is important. This is illustrated by the research into climate-related risks (Chapter 5) and the need to address “new” risks in fit and proper assessments. A balance will have to be struck between legal certainty, legal equality and the desired flexibility and other advantages of open standards. A specific issue concerns the lack of a European level playing field. The study shows that, when it comes to fit and proper testing, there are considerable differences between the legal systems in the various Member States, as well as between the Dutch and European frameworks. In many respects, the Netherlands has heeded the lessons from and after the global financial crisis, but as a result will often be regarded as a ‘strict’ regulator.

Another dilemma concerns legal protection. Although all formal means of legal protection are available to appeal against a ‘negative’ fit and proper decision, both in the Netherlands and at a European level, relatively little use is made of them in practice. In addition, institutions quite regularly choose to ‘withdraw’ a (prospective) board member if a negative decision is expected. In that case, legal protection is not entirely absent, but is considered insufficient. Effective legal protection is, however, of great importance, all the more so since fit and proper decisions can have a profound impact on the professional life of the person concerned and the business operations of the institution, and touch on European fundamental rights such as the freedom to conduct a business, the freedom to choose an occupation and the right to engage in work.

In addition, there is an area of tension between the effectiveness of regulation on the one hand, and the principles of proportionality and subsidiarity on the other. The quality of the law must be such that the weaknesses that were identified during and after the financial crisis are actually remedied or reduced, while at the same time it must be ensured that government intervention does not go further than necessary or that less burdensome alternatives are overlooked. This is all the more true given that fit and proper regulation can have a profound impact on the rights and liberties of private parties and on the fundamental rights mentioned before. In a similar vein, the supervisory authorities should act in both an effective and proportionate way. Competent authorities, such as AFM, DNB and the ECB, should take appropriate measures to address the identified shortcomings while minimising the infringements of existing freedoms and rights.

The dissertation contains various recommendations addressing these legal issues.

First of all, it is recommended that the European legislator develops a well thought-out policy framework for fit and proper tests in the financial sector, taking into account the lessons from and after the financial crisis. The lack of such an overarching vision seems to be the cause of the current patchwork of sectoral regulations and (inexplicable) inconsistencies. The lessons point towards a cross-sectoral, high standard of integrity (propriety, or good repute), a comprehensive set of suitability criteria and the imposition of both integrity and suitability requirements on members of the management body in an executive and non-executive function, regardless of whether the institution has opted for a one-tier or a two-tier board. This underlines the importance of the board’s oversight function. These principles are already firmly anchored in the Dutch legal system, and the adoption of these points in the European frameworks will contribute to the realisation of a European level playing field. It is recommended that the relevant regulations be laid down in directly effective (delegated) regulations instead of directives or guidelines. The harmonising effect of the ESAs’ guidelines in the field of fit and proper testing has proven to be limited in practice.

At the same time, the European legislator should consider whether imposing these requirements is indeed proportionate for each sector and each target group and, if so, to what extent the responsibility for well-functioning governance and good management can remain with the financial institutions themselves. A system in which the supervisory authority limits itself to assessing the procedures and measures followed by the institutions, without carrying out individual suitability tests, might, in some cases, be sufficient. It should also be decided whether the supervisor may follow a risk-based approach, so that not every test needs to be equally thorough.

To enhance legal certainty and equality, the European legislator should clarify the key provisions defining the groups of persons to be tested, and these concepts should be harmonised cross-sectorally. When designing the integrity test, a list of relevant past conduct and antecedents should be drawn up as completely as possible, without, however, being exhaustive. The suitability requirements should also be formulated as clearly and concretely as possible, without the standards losing their flexibility. In order to increase legal certainty and proportionate supervision, it is recommended that a limitation period be introduced for past conduct and convictions, after which those facts can no longer be taken into account in fit and proper assessments. Also, a maximum period should be set for the exclusion of a person from the financial sector.

Secondly, national legislators must ensure that directives are correctly implemented in national legal systems. Dutch autonomous provisions, which do not have a European origin, should be critically examined by the Dutch legislator. To the extent that these provisions already give rise to legal problems, it would be advisable to adjust or repeal the law, whereas Dutch particularities such as the ‘integrity passport’ or the cooperation between the prudential and conduct of business supervisory authorities could serve as a source of inspiration for the European legislator. A number of provisions, including those relating to the second echelon and the Dutch integrity-test, should be brought into line with European regulation.

The study identifies several areas of overlap between supervision and banking disciplinary law. It is recommended that the legislator take account of this concurrence and design the legislation in such a way that duplicate proceedings can be avoided and sanctions imposed, when added together, do not have a disproportionate impact on the person involved. An important task of the legislator is also to ensure effective legal protection. Concrete suggestions are to give withdrawn candidates the right to request the supervisory authorities to take a fit and proper decision, with the possibility to appeal this decision, and the possibility of a closed hearing at the request of the person concerned.

Finally, the national competent authorities should make every effort to incorporate European guidelines in their supervisory practices. Mutual cooperation and knowledge sharing can promote a consistent application of the set standards, and thus further contribute to the level playing field. In addition, it is of the utmost importance that supervisory authorities observe a careful (re-)assessment process, in which antecedents and past conduct are carefully investigated and weighed, and supervisory measures are, indeed, proportionate. It should be ascertained whether shortcomings, if identified, can be remedied by imposing conditions, obligations or recommendations in a ‘positive’ fit and proper decision. Supervisors should behave professionally and not discourage legal action. They must also pay close attention to the importance of diversity in the collective. An ongoing dialogue between the supervisory authorities and financial institutions about the succession plan can help in attracting and approving candidates with a diverse profile. It is also very important that supervisors are as transparent as possible about the requirements set, the interpretation of open standards and the implementation of the assessment process in practice. In the vast majority of cases, candidates pass the test and a single “spot” is rarely fatal. Openness about the process may help to remove some of the mystique surrounding the tests and promotes legal certainty.