Clarification: Assessment of suitability of members of bank supervisory boards

In light of the information emerging in public since the recent resignation of three members of the supervisory board of NLB, the Bank of Slovenia wishes to clarify the procedure for assessing candidates for membership of a bank supervisory board. In so doing it will not take a comparative position with regard to the procedures conducted by other authorities. 

REGULATIONS
The conditions for the appointment of members of a bank’s supervisory board are set out in the Banking Act (ZBan-2). It stipulates:

Article 53
(conditions for appointment as member of a bank’s supervisory board)
(1) A person may be appointed as a member of a bank’s supervisory board if:
1. they possess the knowledge, skills and experience required to supervise and monitor the operations of a bank or an undertaking of similar size and activity to those of a bank, or other similar transactions;
2. they enjoy the reputation and possess the traits required to supervise the management of a bank’s operations, and their conduct does not raise doubt about their ability to ensure the safe and prudent supervision of the management of a bank’s operations in accordance with professional diligence and the highest ethical standards, and the prevention of conflicts of interest; and
3. they are not in breach of Article 36 of this Act, or assurances have been given that the candidate will meet these requirements within six months of the entry of the general meeting resolution on the appointment of a member of the supervisory board in the companies register.
(2) A person is deemed not to enjoy the reputation and possess the traits required to supervise the management of a bank’s operations if:
1. they have been convicted of a criminal offence and the conviction has not yet been expunged from the records; or
2. they have been charged with a criminal offence prosecuted ex officio and for which a prison sentence of a year or more may be imposed.
Article 54
(notification regarding the appointment of member of a bank’s supervisory board)
Within five days following the appointment of a member of its supervisory board at the general meeting of shareholders, a bank shall inform the Bank of Slovenia or the European Central Bank accordingly, whenever the latter performs the tasks set out in point (e) of the first paragraph of Article 4 of Regulation (EU) No 1024/2013 during the supervision of the bank in accordance with the same regulation.

The detailed content of the documentation by means of which a bank demonstrates that the conditions for appointment set out in Article 53 of the ZBan-2 have been met is set out in the Regulation on the documentation for demonstrating fulfilment of the conditions for appointment as a member of the governing body of a bank or savings bank (Official Gazette of the Republic of Slovenia, No. 73/15).

The criteria for the assessment of the suitability of members of governing bodies, i.e. the management board or supervisory board of a bank, are also regulated by the Guidelines on the assessment of the suitability of members of the management body and key function holders (EBA/GL/2012/06; hereinafter: the guidelines), which were published on the EBA website (link). 
Pursuant to Article 13 of the ZBan-2 the Bank of Slovenia transposed the guidelines into the Slovenian legal system via the Regulation on the application of the Guidelines on the assessment of the suitability of members of the management body and key function holders (Official Gazette of the Republic of Slovenia, No. 47/15).

CRITERIA FOR ASSESSING SUITABILITY OF MEMBERS OF GOVERNING BODIES
The guidelines of the European regulator, the EBA, set out standard criteria for assessing the suitability of members of governing bodies. The reputation and professional qualifications or experience of a person and the personal circumstances of the aforementioned person that have an impact on governance (e.g. conflicts of interest, sufficient time to perform the function, independence) are assessed on the basis of these guidelines.

RESPONSIBILITY FOR SUITABILITY ASSESSMENT
Here it should in particular be emphasised (irrespective of the powers of SDH in connection with the appointment of members of the supervisory boards of government-owned banks) that the EBA guidelines stipulate that “assessing the initial and ongoing suitability of members of the management body and key function holders should primarily be the responsibility of the credit institution”, i.e. the bank.

PROCEDURE FOR FORMULATING SUITABILITY ASSESSMENT OF SUPERVISORY BOARD MEMBERS
The bodies of a bank responsible for the selection and appointment of members of the governing body (the management board or supervisory board) shall draw up and implement an appropriate policy for the selection of suitable candidates (Article 34 of the ZBan-2). The bank shall carry out the process of the assessment of the suitability of members of the governing bodies before and after appointment (Article 35 of the ZBan-2). 
In substantive terms (and focusing solely on the appointment of members of a bank’s supervisory board), this means that the bank, and more precisely the general meeting as the body responsible for the appointment of members of the supervisory board, should obtain or formulate an assessment of the suitability of members of the supervisory board before appointment. To formulate the assessment the supervisory board or the supervisory board’s nomination committee (when it has been constituted in accordance with law) draws up an opinion of the suitability of candidates for membership of the supervisory board (Article 50 of the ZBan-2). 
The opinion is an assessment of the suitability of the person that may or may not be taken into account by the general meeting as the body responsible for appointing members of the supervisory board. In any case the opinion should be an assurance of the bank’s internal review of the suitability of the candidate in question, in particular with regard to any circumstances in connection with transactions between the candidate and the bank, i.e. with regard to circumstances that might not be known to the general meeting as the body responsible for appointing members of the supervisory board, and from this perspective the opinion can be an important resource in the general meeting’s decision-making.

An assessment of the suitability of a specific person formulated by a bank in the appointment procedure that includes an opinion from the supervisory board or the nomination committee primarily represents a useful aid in the process of assessment by the Bank of Slovenia, or the ECB (in the case of systemically important banks). The law envisages that in connection with the appointment of a member of the supervisory board, within five business days of passing the supervisory board resolution confirming the suitability of members of the supervisory board, the bank forwards the aforementioned resolution to the Bank of Slovenia or the ECB (in the case of systemically important banks) together with the candidate’s suitability assessment formulated by the bank (Article 35 of the ZBan-2). 
We believe that the assessment process does not encroach on established corporate relations, but instead merely provides for a more structured process of decision-making about the suitability of members of the governing body both by the owners and by supervisory institutions.

ASSESSMENT MADE BY BANK OF SLOVENIA OR ECB
As stipulated by Article 54 of the ZBan-2, within five days of the appointment of a member of the supervisory board of a bank at the general meeting, the bank informs the Bank of Slovenia or the ECB (in the case of systemically important banks).
In its (independent) assessment of the suitability of members of the governing body, the Bank of Slovenia or the ECB uses the following resources and records, in addition to the aforementioned suitability assessment formulated by the bank:
- a completed questionnaire for the assessment of the suitability of a board member (part of the aforementioned Regulation on the documentation for demonstrating fulfilment of the conditions for appointment as a member of the governing body of a bank or savings bank),
- public records (AJPES, GVIN),
- the SMA and the ISA,
- queries directed to supervisory authorities of other countries,
- Bank of Slovenia internal records (minutes and other reports), when the candidate has previously worked at banks,
- minutes and audio recordings of sessions of supervisory boards, management boards (where cooperation, participation in discussion, attendance, etc. are being assessed), 
- documentation and information on the relations between the bank and the candidate or member submitted by the bank to the Bank of Slovenia upon request,
- additional information submissions deriving from media statements or publicly available (internet),
- the findings of the bank’s internal and external auditors,
- analysis of the performance of firms at which the candidate has been employed.
The procedures end with the issue or non-issue of a licence to members of a bank’s management board or with an assessment of suitability or unsuitability for members of a supervisory board. In the last case a procedure for issuing a decision of disqualification from performing the function of a member of a supervisory board is initiated against the unsuitable supervisory board member.