ECB’s Fit & Proper framework: Focus on Boards and Governance
Fit & proper Boards are the foundation of resilient banks
In today’s environment, banks face increasing challenges – from the need to adapt to ESG and digitalisation to the impact of the COVID-19 pandemic and inflation. Establishing a strategy and business model that is resilient in the face of these developments is probably the most important task of banks’ Boards. Or, put differently, the supervisors’ task to ensure a healthy banking sector that is able to withstand adverse developments starts at ensuring fit and proper Board membership.
To this end, European banking regulation includes a number of requirements on the ability, availability and good repute of Board members. However, for significant institutions, the bar is higher, as evidenced by the ECB’s focus on Boards and Governance.
Spotlight: ECB’s 2021 SREP results and key messages on governance:
SREP 2021
In the ECB‘s SREP exercise, not a single bank scored 1 (the top mark) in the ECB‘s assessment of its governance
The ECB highlighted in particular the following shortcomings at Board level:
- Ineffective supervision and steering from the board, weak challenging culture
- Lack of diversity and collective suitability
- Insufficient attention to risk and compliance
Also, the ECB’s supervisory priorities for 2023-2025 list strengthening management bodies’ steering capabilities as one of the three top priorities of ECB:
- Ensure compliance with diversity targets at board level
- Ensure diversity of skills on boards, including IT/cyber risk expertise
- Correct weaknesses in succession planning
- Increase the capacity of boards to provide oversight and challenge management
ECB plans targeted reviews, on-site inspections and fit and proper reassessments to achieve progress in these areas
“Sound internal governance arrangements and effective strategic steering are crucial in ensuring the sustainability of banks’ business models, both during crises and in normal times, and in successfully adapting to ongoing trends, such as digitalization and the green transition. The collective suitability, including adequate collective knowledge, skills and experience, and the diversity of banks’ management bodies strengthen their risk oversight role and are essential to their effective functioning.”
What needs to be done?
Ensuring fit & proper Boards is a difficult process as it involves balancing the interests of a bank’s owners and supervisors
ECB’s Assessment criteria
The ECB’s guide on Fit & Proper assessments lists four dimensions for the assessment of the suitability of board members (in line with the provisions of the CRD):
- Experience
- Reputation
- Conflicts of interest and independence of mind
- Time commitment
While the ECB will assess these dimensions when new board members are appointed and reassess them in specific situations, it is up to the banks themselves to ensure that board members fulfill the Fit & Proper criteria.
PwC’s Fit & Proper Academy
PwC’s Fit & Proper Academy is our service offering targeted at board members to establish compliance with the ECB’s requirements on experience in all relevant topics such as
- Banking and financial markets
- Regulatory and legal requirements
- Risk management, accounting and auditing
PwC Fit & Proper Academy supports boards with a comprehensive set of training courses, individually tailored to both basic and advanced levels, for developing skills and expertise in line with today’s supervisory requirements for board members who will be appointed or are subject to re-assessment.
Individual training courses may be selected from a wide range of topics. Each training course will be presented by Risk & Regulation specialists from our global PwC network. They have extensive experience acquired through various international projects related to the implementation of regulatory and risk management standards combined with deep insights into current supervisory expectations
and benchmarks.
Fit & Proper Academy helps to develop in-depth knowledge and the specific skills needed for roles and responsibilities in a bank’s governance framework for a lasting impact.
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