Response to consultation on Joint ESMA EBA Guidelines on suitability of management body
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a) A board of directors (with or without an executive committee), plus a supervisory board and a statutory auditor (this is the so-called Traditional Model);
b) A board of directors with an executive committee, which must include an audit committee composed by non-executive directors and a statutory auditor (this is the so-called Anglo-Saxon Model);
c) Executive board of directors, plus a general and supervisory board and a statutory auditor (this is the so-called German Model and is similar to the German Vorstand/Aufsichtsrat model).
The circumstances in which the board of directors is entitled to appoint board members are fairly limited in Portugal: in the Traditional and the Anglo-Saxon Models the board is entitled to co-opt other persons in order to replace an existing member that can no longer exercise functions; in the German Model, the general and supervisory board is entitled to appoint board members. There are no circumstances in which the board of directors is entitled to appoint members of the supervisory board or in which the supervisory board itself is entitled to co-opt other persons.
As a result, due to the fact that the use of the German Model is quite residual in Portugal the selection and appointment of the members of the board of directors and the statutory board has a very limited intervention from the institution itself and is mostly dominated by the shareholders.
Furthermore, under Portuguese law, the approval of the suitability policy (termed selection and suitability assessment policy by article 30-A, paragraph 2, of the Legal Framework on Credit Institutions and Financial Companies) is made by the shareholders.
As a result, in order to protect the members of the management body we feel that the Guidelines should contain a provision setting out that the shareholder’s approval of the suitability policy can only be carried out by following a proposal of the management body or otherwise the management body would be required to apply (and be responsible for) a policy with which they are not aligned.
In addition, even though it is not mandatory, most institutions that adopt the Traditional Model have the day to day management of the institution delegated to an executive committee (in line with international best practices and with the conclusions of the Banco de Portugal mandated working group on Governance, Control and Audit Practices and Models for Financial Institutions).
This means that in the Traditional Model there are potentially two corporate bodies in Portugal that can be considered as included in the definition of the management body in its supervisory function: the non-executive members of the board of directors and the members of the supervisory board.
This fact makes it extremely difficult to make the correspondence between the Guidelines and the actual corporate bodies that should assume the responsibilities described in the Guidelines in the Traditional Model.
Furthermore, we feel that this overlap creates a risk that the actual responsibilities and task end up not being applied.
As a result, it is our opinion that an additional paragraph should be included in the Guidelines that deals with these possible overlap situations and which provides guidance on how to allocate responsibilities within each institution and/or requires institutions to implement mechanisms that allow for the effective application of the Guidelines, for example by choosing that one of the corporate bodies expressly assumes the relevant responsibilities.
However, article 109 might be construed as containing an extension of the scope of application of Section II, Chapter 2 of Title VII of the CRDIV which could be very complex and which we believe should be addressed in the Guidelines. In our opinion, only the actual arrangements, processes and mechanisms would apply to such subsidiaries but for example the requirements on article 91 of the CRDIV would not apply.
Furthermore, in our opinion the definition of group is not in line with the CRDIV when applied in paragraph 48. Further comments on this point are provided in our answer to question 6.
The definition of CEO is not completely clear and might not be in line with the CRDIV. Pursuant to the draft Guidelines the CEO would be the person who is responsible for managing and providing steer to manage the overall business activities of an institution. However, if one is to consider the so-called four eyes principle inscribed in article 13 of the CRDIV (pursuant to which at least two persons are required to effectively direct the business of the credit institution) at least two CEOs would need to exist if the definition is applied as it currently stands. We consider that the definition should focus more on the coordination of the executive day to day management either by presiding the executive committee or a separate management committee which does not integrate the management body.
On a first note, the definition of directorship should be adjusted. It should only include positions as a member of the management body of other legal entities in which the member is required to take actual management decisions. For example, there are a number of situations in which a person integrates the management body of pure investment vehicles or intermediate holding companies which do not have any operational activities and which do not require that management decisions are taken other than in some situations for the approval of the annual accounts. These directorships require no time commitment and therefore should be excluded from the calculation and this should be done by amending the definition of directorship.
The operating concept of group for the purposes of paragraph 48 should not be the concept of group as included in the definitions. Pursuant to the relevant definition a group “means a parent undertaking and all its subsidiaries undertakings, as defined in Article 2(9) and (10) of Directive 2013/34/EU”. As a result, it would be possible to argue that only directorships in parent undertakings and subsidiary undertakings forming part of a group that prepares consolidated financial statements pursuant to Directive 2013/34/EU could be considered as single directorships. In our opinion, such an outcome is not reasonable and is not in line with article 91(4)(a) of the CRDIV. In fact, the rule contained in article 91(4)(a) is established because in practice group companies are managed as if they are single entity and the relevant member of the management body does not make a distinction between the possible separate legal entities that are integrated in a group. The fact that those entities are included in a consolidation group (under Directive 2013/34 or similar legislation in third countries) should not be relevant. Instead, the directorships should be considered as a single directorship if there is a single direction between the relevant entities. Therefore, we would recommend that the concept of group is replaced by the following: “means a parent undertaking and all its subsidiaries undertakings, as defined in Article 2(9) and (10) of Directive 2013/34/EU, regardless of the fact that such undertakings are subject to such Directive 2013/34/EU or regardless, including as a result of the fact that they are not included in Annex I and Annex II of Directive 2013/34/EU, and regardless of the location of their head office”. It should also be clear that the “same group” mentioned in paragraph 4(a) is relevant not only for the group in which each institution is included but whatever group (financial or otherwise) in which the relevant person has a directorship in more than one entity.
Furthermore, we tend to agree with the clarification provided in paragraph 53 in relation to directorships held in entities which do not pursue predominantly commercial objectives.
However, in the subparagraph b. of paragraph 53, we feel some examples should be detailed, including professional or self-regulatory associations, unions, political parties, etc.
In addition, in subparagraph c. of paragraph 53, the reference to the private economic interests of members should be adjusted in order to include their families as very often such companies also have other family members as shareholders.
In addition, having been appointed as alternate for a directorship should not be relevant for the assessment of the sufficient time commitment as described in paragraph 39, subparagraph a.. Such an appointment should only be relevant when the person actually starts to exercise functions because before that moment no time commitment is required. This is the case in Portugal and therefore the reference to positions as alternate should be eliminated or a clarification should be included pursuant to which such a position is only relevant if it involves a time commitment.
Furthermore, we feel that it is also counter-productive to include the member’s geographical presence as a criterion to be taken into account in the assessment (as provided for in subparagraph b. of paragraph 39) considering that having a management body with diverse geographical provenance is a policy objective.
The requirements provided for in paragraph 44 in relation to “political functions” should be eliminated. Only professional functions should be relevant. Personal and political functions are not relevant and might lead to discrimination on political purposes which is not allowed under Portuguese constitutional rules.
The examples provided for in paragraph 58 should also include accounting.
In addition further guidance should be provided in relation to the concept of “enforcement actions” included in paragraph 70, subparagraph b.. This concept is not used in Portuguese law and therefore we would recommend that some examples or additional details are provided.
In addition, the Guidelines should make clear that in paragraph 84 the “timeframe within which the necessary measure should be completed” (and information to the competent authority) is only required for situations in which a particular aspect of the knowledge and skill requirements was found wanting.
As mentioned above in our comment to question 2, in our opinion, only the actual arrangements, processes and mechanisms would apply to subsidiaries which are not subject to the CRDIV but for example the requirements on article 91 of the CRDIV would not apply. This should be clarified in paragraphs 107 to 110.
It should be made clear that the assessment mentioned in the second sentence of paragraph 118 could be made as part of the suitability assessment carried out by the institution (and does not have to be carried out separately).
There is a partial overlap between subparagraphs c. and d. of paragraph 124. The fact that the person was in the past a material adviser or a material supplier to the institution should not be relevant for independence purposes as there is no longer an economic dependency from the institution. Guidance should be provided as to the materiality and significance thresholds for subparagraphs c., d. and e. of paragraph 124.
Paragraph 130 should also be adapted to cater for situations that often occur in Portugal and are considered permissible under Portuguese law in which the members are appointed by the shareholders or co-opted but their actual exercise of functions only takes place after the assessment carried out by the institution and the authorisation is obtained from the competent authority. This applies to both new members and members being re-appointed (even if in the latter case a tacit authorisation can be obtained from the Banco de Portugal once a period of 30 days from the application or any clarifications has elapsed – article 30-B(7) of the Legal Framework on Credit Institutions and Financial Companies).
The wording of paragraph 176 should be adjusted and the “to” before “not approve” should be eliminated.
The Guidelines should be clear that the institution is entitled to suggest alternative measures (that will in any case need to be accepted by the competent authority) or otherwise submit a different request for authorisation, if the competent authority makes a proposal pursuant to paragraph 177. This means that the institution is only required to accept the remedies proposed by the competent authority (or alternative remedies proposed by the institution and accepted by the competent authority) if it wishes to maintain the composition of the management body that was assessed by the competent authority.
Question 1: Are there any conflicts between the responsibilities assigned by national company law to a specific function of the management body and the responsibilities assigned by the Guidelines to either the management or supervisory function?
Portuguese law allows institutions to choose between three basic governance models which can include:a) A board of directors (with or without an executive committee), plus a supervisory board and a statutory auditor (this is the so-called Traditional Model);
b) A board of directors with an executive committee, which must include an audit committee composed by non-executive directors and a statutory auditor (this is the so-called Anglo-Saxon Model);
c) Executive board of directors, plus a general and supervisory board and a statutory auditor (this is the so-called German Model and is similar to the German Vorstand/Aufsichtsrat model).
The circumstances in which the board of directors is entitled to appoint board members are fairly limited in Portugal: in the Traditional and the Anglo-Saxon Models the board is entitled to co-opt other persons in order to replace an existing member that can no longer exercise functions; in the German Model, the general and supervisory board is entitled to appoint board members. There are no circumstances in which the board of directors is entitled to appoint members of the supervisory board or in which the supervisory board itself is entitled to co-opt other persons.
As a result, due to the fact that the use of the German Model is quite residual in Portugal the selection and appointment of the members of the board of directors and the statutory board has a very limited intervention from the institution itself and is mostly dominated by the shareholders.
Furthermore, under Portuguese law, the approval of the suitability policy (termed selection and suitability assessment policy by article 30-A, paragraph 2, of the Legal Framework on Credit Institutions and Financial Companies) is made by the shareholders.
As a result, in order to protect the members of the management body we feel that the Guidelines should contain a provision setting out that the shareholder’s approval of the suitability policy can only be carried out by following a proposal of the management body or otherwise the management body would be required to apply (and be responsible for) a policy with which they are not aligned.
In addition, even though it is not mandatory, most institutions that adopt the Traditional Model have the day to day management of the institution delegated to an executive committee (in line with international best practices and with the conclusions of the Banco de Portugal mandated working group on Governance, Control and Audit Practices and Models for Financial Institutions).
This means that in the Traditional Model there are potentially two corporate bodies in Portugal that can be considered as included in the definition of the management body in its supervisory function: the non-executive members of the board of directors and the members of the supervisory board.
This fact makes it extremely difficult to make the correspondence between the Guidelines and the actual corporate bodies that should assume the responsibilities described in the Guidelines in the Traditional Model.
Furthermore, we feel that this overlap creates a risk that the actual responsibilities and task end up not being applied.
As a result, it is our opinion that an additional paragraph should be included in the Guidelines that deals with these possible overlap situations and which provides guidance on how to allocate responsibilities within each institution and/or requires institutions to implement mechanisms that allow for the effective application of the Guidelines, for example by choosing that one of the corporate bodies expressly assumes the relevant responsibilities.
Question 2: Are the subject matter, scope and definitions sufficiently clear?
Paragraph 10 contains a partial reference to article 109 of the CRDIV in relation to subsidiaries not subject to the CRDIV which is not further developed in the Guidelines.However, article 109 might be construed as containing an extension of the scope of application of Section II, Chapter 2 of Title VII of the CRDIV which could be very complex and which we believe should be addressed in the Guidelines. In our opinion, only the actual arrangements, processes and mechanisms would apply to such subsidiaries but for example the requirements on article 91 of the CRDIV would not apply.
Furthermore, in our opinion the definition of group is not in line with the CRDIV when applied in paragraph 48. Further comments on this point are provided in our answer to question 6.
The definition of CEO is not completely clear and might not be in line with the CRDIV. Pursuant to the draft Guidelines the CEO would be the person who is responsible for managing and providing steer to manage the overall business activities of an institution. However, if one is to consider the so-called four eyes principle inscribed in article 13 of the CRDIV (pursuant to which at least two persons are required to effectively direct the business of the credit institution) at least two CEOs would need to exist if the definition is applied as it currently stands. We consider that the definition should focus more on the coordination of the executive day to day management either by presiding the executive committee or a separate management committee which does not integrate the management body.
Question 3: Is the scope of assessments of key function holders by CRD-institutions appropriate and sufficiently clear?
Yes.Question 4: Do you agree with this approach to the proportionality principle and consider that it will help in the practical implementation of the guidelines? Which aspects are not practical and the reasons why? Institutions are asked to provide quantitative and qualitative information about the size, internal organisation and the nature, scale and complexity of the activities of their institution to support their answers.
Yes.Question 5: Do you consider that a more proportionate application of the guidelines regarding any aspect of the guidelines could be introduced? When providing your answer please specify which aspects and the reasons why. In this respect, institutions are asked to provide quantitative and qualitative information about the size, internal organisation and the nature, scale and complexity of the activities of their institution to support their answers.
Yes, but we feel that the number of employees of an institution should also be a relevant criterion to be considered in the application of the principle of proportionality.Question 6: Are the guidelines with respect to the calculation of the number of directorships appropriate and sufficiently clear?
We feel that the guidelines with respect to the calculation of the number of directorships could be improved.On a first note, the definition of directorship should be adjusted. It should only include positions as a member of the management body of other legal entities in which the member is required to take actual management decisions. For example, there are a number of situations in which a person integrates the management body of pure investment vehicles or intermediate holding companies which do not have any operational activities and which do not require that management decisions are taken other than in some situations for the approval of the annual accounts. These directorships require no time commitment and therefore should be excluded from the calculation and this should be done by amending the definition of directorship.
The operating concept of group for the purposes of paragraph 48 should not be the concept of group as included in the definitions. Pursuant to the relevant definition a group “means a parent undertaking and all its subsidiaries undertakings, as defined in Article 2(9) and (10) of Directive 2013/34/EU”. As a result, it would be possible to argue that only directorships in parent undertakings and subsidiary undertakings forming part of a group that prepares consolidated financial statements pursuant to Directive 2013/34/EU could be considered as single directorships. In our opinion, such an outcome is not reasonable and is not in line with article 91(4)(a) of the CRDIV. In fact, the rule contained in article 91(4)(a) is established because in practice group companies are managed as if they are single entity and the relevant member of the management body does not make a distinction between the possible separate legal entities that are integrated in a group. The fact that those entities are included in a consolidation group (under Directive 2013/34 or similar legislation in third countries) should not be relevant. Instead, the directorships should be considered as a single directorship if there is a single direction between the relevant entities. Therefore, we would recommend that the concept of group is replaced by the following: “means a parent undertaking and all its subsidiaries undertakings, as defined in Article 2(9) and (10) of Directive 2013/34/EU, regardless of the fact that such undertakings are subject to such Directive 2013/34/EU or regardless, including as a result of the fact that they are not included in Annex I and Annex II of Directive 2013/34/EU, and regardless of the location of their head office”. It should also be clear that the “same group” mentioned in paragraph 4(a) is relevant not only for the group in which each institution is included but whatever group (financial or otherwise) in which the relevant person has a directorship in more than one entity.
Furthermore, we tend to agree with the clarification provided in paragraph 53 in relation to directorships held in entities which do not pursue predominantly commercial objectives.
However, in the subparagraph b. of paragraph 53, we feel some examples should be detailed, including professional or self-regulatory associations, unions, political parties, etc.
In addition, in subparagraph c. of paragraph 53, the reference to the private economic interests of members should be adjusted in order to include their families as very often such companies also have other family members as shareholders.
Question 7: Are the guidelines within Title II regarding the notions of suitability appropriate and sufficiently clear?
The concept of “buffer” provided for in paragraph 38 in order to deal with acquisitions, mergers, takeovers, crisis situations or major difficulties should be eliminated. This is a vague concept which can be used discretionally by the competent authorities.In addition, having been appointed as alternate for a directorship should not be relevant for the assessment of the sufficient time commitment as described in paragraph 39, subparagraph a.. Such an appointment should only be relevant when the person actually starts to exercise functions because before that moment no time commitment is required. This is the case in Portugal and therefore the reference to positions as alternate should be eliminated or a clarification should be included pursuant to which such a position is only relevant if it involves a time commitment.
Furthermore, we feel that it is also counter-productive to include the member’s geographical presence as a criterion to be taken into account in the assessment (as provided for in subparagraph b. of paragraph 39) considering that having a management body with diverse geographical provenance is a policy objective.
The requirements provided for in paragraph 44 in relation to “political functions” should be eliminated. Only professional functions should be relevant. Personal and political functions are not relevant and might lead to discrimination on political purposes which is not allowed under Portuguese constitutional rules.
The examples provided for in paragraph 58 should also include accounting.
In addition further guidance should be provided in relation to the concept of “enforcement actions” included in paragraph 70, subparagraph b.. This concept is not used in Portuguese law and therefore we would recommend that some examples or additional details are provided.
Question 8: Are the guidelines within Title III regarding the Human and financial resources for training of members of the management body appropriate and sufficiently clear?
The reference in paragraph 83 to key information being provided “at the latest directly after taking up the position” is not clear.In addition, the Guidelines should make clear that in paragraph 84 the “timeframe within which the necessary measure should be completed” (and information to the competent authority) is only required for situations in which a particular aspect of the knowledge and skill requirements was found wanting.
Question 9: Are the guidelines within Title IV regarding diversity appropriate and sufficiently clear?
Yes.Question 10: Are the guidelines within Title V regarding the suitability policy and governance arrangements appropriate and sufficiently clear?
Paragraph 105 should also provide a reference to “without prejudice to any required shareholders’ approval” in relation to the amendment of the policy in line with paragraphs 98 and 100.As mentioned above in our comment to question 2, in our opinion, only the actual arrangements, processes and mechanisms would apply to subsidiaries which are not subject to the CRDIV but for example the requirements on article 91 of the CRDIV would not apply. This should be clarified in paragraphs 107 to 110.
It should be made clear that the assessment mentioned in the second sentence of paragraph 118 could be made as part of the suitability assessment carried out by the institution (and does not have to be carried out separately).
There is a partial overlap between subparagraphs c. and d. of paragraph 124. The fact that the person was in the past a material adviser or a material supplier to the institution should not be relevant for independence purposes as there is no longer an economic dependency from the institution. Guidance should be provided as to the materiality and significance thresholds for subparagraphs c., d. and e. of paragraph 124.
Question 11: Are the guidelines within Title VI regarding the assessment of suitability by institutions appropriate and sufficiently clear?
Under Portuguese law, members of the management body can only exercise functions after having been assessed by the institution and authorised by the competent authority. This means that even in situations where the shareholders have appointed such persons as members of the management board they will not be allowed to exercise functions until the relevant assessment and authorization are complete. Therefore, the three weeks period referred to in paragraph 127 should not apply in these situations and should only apply to situations in which the relevant members already exercise their functions (and which would be relevant for other jurisdictions). A time limit for an ex post assessment only makes sense in a situation where the member is already exercising his functions.Paragraph 130 should also be adapted to cater for situations that often occur in Portugal and are considered permissible under Portuguese law in which the members are appointed by the shareholders or co-opted but their actual exercise of functions only takes place after the assessment carried out by the institution and the authorisation is obtained from the competent authority. This applies to both new members and members being re-appointed (even if in the latter case a tacit authorisation can be obtained from the Banco de Portugal once a period of 30 days from the application or any clarifications has elapsed – article 30-B(7) of the Legal Framework on Credit Institutions and Financial Companies).
Question 12: Are the guidelines with regard to the timing (ex-ante) of the competent authority’s assessment process appropriate and sufficiently clear?
As mentioned in our answer to the previous question, as a result of Portuguese law the competent authority’s assessment must always be made before actual functions in the management body is initiated. The maximum period should be three months or less. We feel that a maximum minimum period should not be established.Question 13: Which other costs or impediments and benefits would be caused by an ex-ante assessment by the competent authority?
Under Portuguese law ex-ante assessments by the competent authority are mandatory as the relevant member can only start to exercise functions after the assessment is made and an authorisation by the competent authority has been granted.Question 14: Which other costs or impediments and benefits would be caused by an ex-post assessment by the competent authority?
Under Portuguese law ex-ante assessments by the competent authority are mandatory as the relevant member can only start to exercise functions after the assessment is made and an authorisation by the competent authority has been granted.Question 15: Are the guidelines within Title VII regarding the suitability assessment by competent authorities appropriate and sufficiently clear?
Adequate prior notice should be provided to the institution in situations where the competent authority wishes to participate as an observer in the meetings of the management body pursuant to paragraph 171.The wording of paragraph 176 should be adjusted and the “to” before “not approve” should be eliminated.
The Guidelines should be clear that the institution is entitled to suggest alternative measures (that will in any case need to be accepted by the competent authority) or otherwise submit a different request for authorisation, if the competent authority makes a proposal pursuant to paragraph 177. This means that the institution is only required to accept the remedies proposed by the competent authority (or alternative remedies proposed by the institution and accepted by the competent authority) if it wishes to maintain the composition of the management body that was assessed by the competent authority.