Guidance on the Evaluation of Requirements and Suitability Criteria for Corporate Representatives

Sottotitolo

by Marco De Leonardis

Introduction: The Purpose of the Bank of Italy’s Intervention.

Following the issuance of Ministerial Decree 23 November 2020, no. 169 (the “Decree”) concerning the requirements and suitability criteria for corporate representatives of banks, financial intermediaries, mutual guarantee consortia, electronic money institutions, payment institutions, and depositor guarantee schemes (the “Intermediaries”), the Bank of Italy has conducted a benchmarking study aimed at analyzing the concrete application methods of the various Intermediaries regarding the provisions contained in the Decree. The objective was to identify the most virtuous practices and to identify the major applicative criticalities of the new regulatory provisions.

It is important to recall how the Decree has profoundly modified the discipline relating to the suitability requirements of Representatives (understood as Administrators, Auditors, and, where provided for, the General Manager) of Intermediaries and the verification procedure by the Body entrusted with the task of verification.

Specifically, for the purposes of this discussion, the Decree has:

  • Introduced a differentiation between requirements and suitability criteria, the latter characterized by a greater evaluative discretion;
  • Provided that the assessment of the suitability of individual Representatives would be carried out by the Competent Body, to be identified respectively (i) in the Body with Strategic Supervisory Function, in the case of evaluation of the requirements and suitability criteria of Administrators and, where provided for, the General Manager; (ii) in the Board of Statutory Auditors in the case of evaluation of the requirements and suitability criteria of Auditors;
  • Extended the evaluations to be carried out during the checks, including correctness, competence, independence of judgment, as well as the adequate collective composition of the bodies and the availability of time, and for only larger or operationally complex banks, the limits on the accumulation of positions;
  • Provided, for only larger or operationally complex banks, the application of certain requirements and criteria to the heads of the main business functions.

From the study conducted by the Bank of Italy, certain critical aspects of the practices related to the evaluation of the suitability of Representatives have emerged, on which the Supervisory Authority deemed it appropriate to intervene by providing appropriate clarifications aimed at guiding the conduct of Intermediaries.

Analyzing, therefore, the market best practices, the Supervisory Authority, on 13 November 2023, issued the “Guidelines on the Evaluation of Requirements and Suitability Criteria for Corporate Representatives of LSI banks, financial intermediaries, mutual guarantee consortia, electronic money institutions, payment institutions, fiduciary companies and depositor guarantee schemes” (the “Guidelines”), recommending that Intermediaries adapt to them in preparing appropriate fit and proper policies (“Policies”) which, in addition to ensuring better governance of the suitability verification process, may also constitute a useful support for the shareholders of Intermediaries in carrying out their analyses in the renewal of corporate bodies.

The content of the prescriptions of the individual guidelines. After briefly illustrating the objectives pursued by the Supervisory Authority, we will now proceed to illustrate the individual prescriptions contained in the Guidelines.

(a) Guideline 1: policy and questionnaire.

Guideline 1 provides that Intermediaries should adopt a Policy describing the procedure for acquiring the necessary information for the Competent Body to evaluate the requirements and suitability criteria of Representatives. Guideline 1 specifies that the collection of the aforementioned information should be carried out by means of standardized questionnaires which, together with the verification report, the Representative’s curriculum vitae, and consent to the processing of personal data, should be transmitted to the Bank of Italy.

(b) Guideline 2: verbalization.

Guideline 2 reiterates a well-known principle repeatedly invoked in supervisory regulations: the analytical nature of the verbalization in the verification of the requirements and suitability criteria of Representatives. Briefly, the Supervisory Authority highlights how it would be appropriate for the minutes of the Competent Body’s verification of the requirements of the Representatives to contain all the informational elements underlying the judgments made by the Body entrusted with verification tasks.

(c) Guideline 3: verbalization of remedial actions.

Guideline 3, valuing the principle that the assessment of the existence of the requirements and suitability criteria of Representatives is left to the Competent Body, provides that it is always up to the said Body to assess the anomalies that may emerge during the verification, adopting the necessary case-by-case initiatives for their rectification, defining also, if necessary, the timing for their resolution.

(d) Guideline 4: evaluation of the correctness criterion.

Guideline 4, in implementation of Article 5 of the Decree, which leaves to the Competent Body the task of assessing the existence of the correctness criterion in relation to a Representative who finds himself in one of the situations referred to in Article 4 of the same Decree, establishes that the Competent Body should diligently acquire the documentation necessary for carrying out the evaluation required by the regulations, also acquiring, if necessary, opinions from legal consultants of the Representative under evaluation.

(e) Guideline 5: evaluation of the professionalism requirement and competence criterion.

Guideline 5, in implementation of Articles 7 et seq. of the Decree, indicates the information that the Competent Body should acquire for the correct evaluation of the professionalism requirement (related to the positions actually held by the Representative – cf. Article 7 of the Decree) or the competence criterion (related to the knowledge of certain sectors by the Representative, evaluation which – as known – can be omitted if the possession of the professionalism requirement for a time at least equal to that indicated in the Annex to the Decree is found).

Specifically, Guideline 5 provides that the acquired information should include:

  • concise references such as/quantitative in relation to the tasks actually carried out by the Representative in each professional experience, any managerial/leadership/coordinating roles covered, the company/professional context of reference;
  • actual period of each experience;
  • the specialized skills acquired during their professional career, accompanied by a brief illustration of the professional experiences that have allowed their development;
  • any element suitable for enabling a comparative analysis between the company context in which the experience was gained and that of the intermediary in which the Representative assumed the position, where the valorization of the experience in question – for the purposes of the verification of the requirements – is subject to a prior assessment of equivalence between the two entrepreneurial realities.

(f) Guidelines 6 โ€“ 7: formal and judgmental independence.

Articles 13 et seq. of the Decree provide that, in cases provided for by law and the relevant implementing provisions, certain Administrators and all Auditors must possess the requirement of formal independence while, under Article 15 of the Decree, all Representatives are required to act with full independence of judgment and awareness of the duties and rights inherent in the position, in the interest of sound and prudent management.

For the purpose of this verification, the Decree requires Competent Bodies to verify, among other things, whether Representatives have or have had in the two years preceding the assumption of the position, directly or indirectly, “self-employed or employed relationships or other financial, patrimonial or professional relationships, even non-continuous”, with the specific counterparties identified by the Decree and whether such relationships are “such as to compromise their independence”.

In order to strengthen the verification procedures, Guideline 6 prescribes that it is good practice for the Policies adopted by Intermediaries to identify all relevant circumstances for the evaluation of the formal and/or judgmental independence of the Representative, specifying the perimeter of indirect relationships relevant for these purposes.

Guideline 6 clarifies that Intermediaries should be required to include among indirect relationships at least the relationships between Intermediaries, their Executive Representatives or their president, companies controlled by the Intermediary or their Executive Representatives or their presidents, or a participant of the entity or its Representatives, and:

  • companies or businesses (also established in non-corporate form) controlled, also jointly with other subjects, directly or indirectly, by the Representative or by his relatives or affiliates up to the 4th degree;
  • companies in which the Representative holds, directly or indirectly, non-material participations in terms of capital or voting rights (e.g. 10%);
  • companies in which the Representative holds a corporate position.

From another perspective, Guideline 7 – with the aim of specifying the cases in which the formal and judgmental independence of the Representative may be compromised – has provided that Intermediaries must adopt Policies that define the qualitative/quantitative criteria for identifying relationships to be considered obstacles to the existence of formal independence or independence of judgment.

To this end, Guideline 7 specifies that the criteria:

  • discriminate between the different types of relationships referred to in Article 13, paragraph 1, letter h) of the Decree, in order to adequately capture the relevance of conflicts of interest, including potential ones, arising from them;
  • take adequate account of the position held by the Representative within the entity and his/her possible participation in decision-making processes (e.g. the provision of credit or the conclusion of commercial partnerships) potentially affected by the aforementioned conflicts of interest;
  • include materiality thresholds, below which it can reasonably be excluded that the relationships are such as to influence the assessments of the Representatives, and tolerance thresholds, beyond which the relationships are to be considered problematic;
  • in relation to indirect exposures, promote, once a certain threshold of commitments granted by the entity to companies attributable to the Representative is exceeded, the differentiation of the sources of indebtedness of the company/group concerned, so as to reduce the maximum percentage relevance of the loans granted or granted by the supervised entity in which the Representative/entrepreneur sits compared to those granted by the system as a whole and their potential impact on its independence (formal or judgmental).

(g) Guideline 8: time commitment and limit on the accumulation of positions.

Finally, it should be noted that Articles 16 et seq. of the Decree provide that the Intermediary must communicate to the Representatives the period of time considered necessary for the effective performance of the specific position held, also indicating the limits on the cumulative positions that may be held.

In this regard, Guideline 8 provides that the time availability necessary to hold the position should always be communicated by the Intermediary to the Representative and that this time estimate should be constantly updated in relation to:

(i) the time absorbed by participation in the meetings of the same Body and any endo-board or managerial committees, also taking into account historical data on the frequency and duration of such meetings; from the study of pre-board information; from informal interactions with corporate structures and control functions; from other commitments normally connected with the exercise of the functions;

(ii) the role played by each Representative, in order to arrive at estimates that differentiate the absorption of time according, at least, to the executive or non-executive nature of the position and the possible role of chairmanship of the Body or of endo-board or managerial committees;

(iii) the size, complexity, and technical situation of the Intermediary.

Likewise, the Intermediary, in order to ensure the overall sustainability of the activities carried out, – depending on the type of position held – should foresee the maximum number of additional positions that each Representative can hold during the term of office.

The Bank of Italy has provided in Guideline 8 – which is referred to – an exemplification of a time commitment and position accumulation policy considered in line with sector regulations for a small-sized Intermediary with reduced complexity, with technical balances without significant problems and not involved in projects with high time absorption.

Conclusions

From the synthetic analysis of the Guidelines, it seems to emerge an ever-greater attention from the Supervisory Authority to the issue of requirements and suitability criteria for the performance of the position of Representatives, as efficient governance is undoubtedly to be considered the necessary prerequisite for compliance with the principle of sound and prudent management, which constitutes both the main management rule of the Intermediary and the ultimate goal of supervisory activity.