3.7.2 The lessons of the financial crisis

To answer this question, a return to the lessons of the financial crisis is required. Generally speaking, the crisis led to a loss of public confidence in almost all financial institutions. Restoring trust in these institutions and maintaining it in the long term can therefore be regarded as one of the main objectives of (post-crisis) financial regulation.1

For example, the objective of the revised UCITS directive in 2014 is to improve investor confidence in UCITS.2 In a similar vein, the new rules laid down in PSD 2 are also intended to strengthen the trust of consumers in a harmonized payments market, which is deemed essential for the functioning of vital economic and social activities.3

Moreover, recovery and resolution regulation is being implemented in the Netherlands for insurance companies, mirroring to a certain extent the Bank Recovery and Resolution Directive (BRRD) which applies to credit institutions (and certain investment firms). This new regulation is deemed necessary because of the important social function of insurance companies and the need to safeguard public trust in the insurance sector.4

Pension funds also have an important social purpose in that they supplement retirement income from public sources. The loss of public confidence in private pensions, which occurred in many countries as a result of the financial crisis, needs to be reversed.5 In the Netherlands, the Frijns report concluded in 2010 that, in order to restore trust in the pension system, the expertise of members of the management body should be enhanced by including knowledge and experience (for example, of risk and asset management) and skills such as independence of mind. This has resulted in additional regulation in Dutch pension laws.6

Of course, not all sectors are of equal importance to the trust and stability of the system, and major differences may exist among financial institutions. However, even mismanagement in a small pension fund, insurance company or payment institution, or indeed an integrity scandal affecting an individual board member, may have a significant impact on public trust in the financial sector as a whole. For example, Dutch misselling scandals, especially with respect to very expensive life assurance contracts (beleggingsverzekeringen), led to a serious loss of public confidence, which has still not been restored today. In the same way, the bankruptcy of a relatively small bank such as DSB Bank also led to a considerable loss of confidence among the Dutch public.7

Financial institutions can only act through people. The members of the management bodies and senior management are the people who direct the course of the business of the financial institution and effectively take the decisions that impact both the financial solidity of the institution and the interests of investors, consumers, depositors and policyholders, and whose decisions may even affect the stability of the financial system as a whole. The restoration of trust is therefore highly dependent on the decisions of the management body and senior management. This stresses the importance of their suitability.

The need to rebuild this trust might therefore be of cross-sectoral relevance in that it requires high levels of suitability within all financial institutions. Accordingly, the relevance of the lessons learned from the financial crisis, which are aimed at rebuilding this trust and ensuring a sound governance framework, should not be restricted to banks and investment firms.8

For example, the conclusions that were drawn from the financial crisis in the EU Green Paper (2010) are meant to be of relevance for banks and life insurance companies alike, and may be of relevance for all regulated financial institutions.9 In this paper the EC highlights the importance of suitability criteria such as:(i) financial expertise; (ii) skills; (iii) independence of mind (independent judgement and the ability to challenge the management); (iv) diversity (with regard to cultural, educational, professional and legal background and also with regard to age and gender); and (v) time commitment. It also stresses the importance of subjecting non- executive directors to the same criteria.

Similar suitability requirements can be found in the recently revised OECD Guidelines on Insurer Governance, published on 16 November 2017.10 These guidelines advocate a set of fit and proper requirements for board members of insurers (including life, non-life and reinsurance), comparable to the requirements laid down in CRD IV.11 According to these international standards, board members of insurance companies should be subject to fit and proper requirements comparable to those applicable to credit institutions.

A cross-sectoral approach is also found in the Larosière report (2009). Here corporate governance is identified as one of the most important failures responsible for the crisis. Action is said to be necessary in all financial sectors, leading to equivalent standards throughout the internal market.12 In the Netherlands a parliamentary inquiry committee established after the crisis concluded that there had been a serious loss of public trust in the financial sector, not restricted to credit institutions. Among its recommendations were that the role of non-executive members of the management body should be strengthened. It also stressed the importance of suitability criteria such as expertise, time commitment, diversity and independence of mind. These recommendations were meant to be applied not only to credit institutions but also to other financial institutions, particularly insurance companies and pension funds.13

The more recent G20/OECD Principles of Corporate Governance (2015) also take a cross-sectoral approach, focusing on all publicly traded companies, both financial and non-financial.14 These principles state that the management body should apply high ethical standards, commit sufficient time, and be able to exercise objective and independent judgement (thereby preventing conflicts of interests and ensuring that a sufficient number of board members are independent of management).15 The principles are intended to have cross-sectoral relevance even beyond the financial world. This relevance may not be limited to listed companies, as the principles also provide that in so far as they are deemed applicable, they might also be a useful tool in improving corporate governance in companies whose shares are not publicly traded.