FSI Paper Reviews Fit and Proper Assessment Criteria at Banks

The 19 jurisdictions reviewed in this assessment include the US, the UK, EU, Australia, Bahrain, Belgium, Brazil, Chile, China, Germany, Hong Kong, India, Malaysia, the Netherlands, Nigeria, the Philippines, Russia, South Africa, and Thailand. The paper finds that, while all jurisdictions prescribe the "fit and proper" criteria, some have no regulatory powers to approve board candidates or they do not require prior approval of all bank directors. Where prior regulatory approval is required, regulatory decisions are driven by the fitness criterion, which comprises a range of different factors. When it comes to board composition, nearly all authorities require the chair and the CEO roles to be separated and many prescribe an appropriate mix of executive directors, non-executive directors, and independent non-executive directors on the board. In this context, all jurisdictions provide guidance on what is not considered "independent," focusing on the relationship between a bank and a director. Several jurisdictions also impose tenure limits for non-executive directors and independent non-executive directors. As for board structure, most authorities require banks to establish risk, audit, and remuneration committees, while ethics and culture committees are rare. While regulatory guidance on corporate governance is applicable to all banks, authorities differentiate expectations through the use of proportionality.

The review of fit and proper assessment approaches identifies practices that may be useful for supervisory authorities. Authorities might, where appropriate, seek regulatory powers to approve board candidates and determine whether aspects of the fitness criterion can be enhanced to help support desired outcomes. These include clarifying the “expertise” requirements of board candidates, particularly the board chair and the chair of board subcommittees; assessing the time commitment of board candidates, considering their outside obligations; incorporating the “independence of mind” concept, which goes beyond determining whether candidates have a conflict of interest; and outlining the role of interviews in the assessment process. In determining formal independence, supervisory assessments might be improved by defining more concrete attributes for an independent non-executive director, establishing maximum tenure limits for an independent non-executive director, and monitoring how often an independent non-executive director dissents from the majority opinion.

Related Links

• Notification
• Paper on Policy Implementation (PDF)

Keywords: International, Banking, Operational Risk, Fit and Proper Criteria, Governance, Proportionality, FSI