More stringent regulations with respect to suitability screening
One of the lessons learned from the financial crisis is the importance of having suitable senior management in place in the financial services industry. This is why, in addition to the existing integrity screening process, senior management has since January 2011 also been subjected to a more stringent suitability screening under the Policy Rule on Suitability. Since July 2012 this has also applied to supervisory directors; the legislator has decided that internal supervisors too have to be suitable for their role. Once screened, executive and supervisory directors are not screened by DNB again when they are reappointed.
Percentage of ‘unsuitable’ directors is falling
In conjunction with the Pension Fund Governance Reinforcement Act, the suitability requirement led to an incidental increase in the number of screenings:the more stringent suitability testing resulted in a considerable number of rejections, with a peak of 14% in 2013. In 2014 this percentage had fallen to 13%, resulting in slightly more candidates passing the test. Although this decrease is limited and only relates to a single calendar year, the figures per sector support the impression that the quality of candidates proposed by banks, insurers and pension funds is rising. This implies that the Policy Rule is contributing to the stability and integrity of financial institutions.
Professional recruitment delivers higher-quality candidates
Since 2011, a total of 5,469 candidates have been screened (see table), of which 614 were rejected as 'unsuitable' or because of doubts regarding their integrity. This means that, across the board, 87% of candidates passed the screening. There are significant differences between the various sectors, however. For example, the percentage of rejected candidates for credit institutions (banks) is lower (11%) than that for trust offices (36%) and payment institutions (38%). Within sectors too, there can be considerable differences according to the type or size of institutions. Large institutions and institutions that already have experience with proposing candidates for the DNB screening procedure often have professional recruitment and selection processes in place. As a result, they are able to propose more suitable candidates.
Lack of relevant knowledge
The screenings are carried out according to a carefully organised process, which may involve the Netherlands Authority for the Financial Markets (AFM). On the basis of the documentation submitted, DNB may decide to invite a candidate for a screening interview. Complex cases, such as the decision to reject a candidate, involve a number of checks and balances at multiple levels. Depending on the degree of complexity, one or more follow-up screening interviews may be part of the screening process. In case of a rejection, candidates can appeal against this decision.
One of the reasons why candidates may be rejected is that they are insufficiently prepared for their new position and the institution where they will be working. For example, they do not know exactly what their position within the management board will be, or what their area of responsibility within the supervisory board will be (for example IT, or Compliance). Sometimes management board candidates assume that knowledge about the other areas is not required, failing to realise that management board members must be able to make decisions in these areas as well – since they bear overall responsibility.
Sometimes, first-time screenings of incumbent supervisory board members reveal that they are insufficiently aware of the most important issues at their institution. Some candidates lack substantive knowledge of the rules and regulations applicable to the institution. For example, they may not be familiar with concepts such as Solvency II or SREP, which are essential to the supervisory framework for financial institutions. This does not imply that it is not permitted to propose candidates from outside the sector, but they should possess relevant basic knowledge of the sector and of the institution in question.
Competencies also count
A candidate’s competencies are also considered in assessing their suitability. Suitable candidates should possess the right knowledge and skills and demonstrate appropriate behaviour. It depends on the candidate's position and on the type, size, complexity and risk profile of the institution which competencies are considered important. A lack of competencies such as responsibility, judgement and independence may be a reason to reject a candidate. For example, it may become clear during the screening interview that the candidate does not understand the internal and external stakeholders, fails to consider these carefully or is unable to reflect on his or her actions. Likewise, it might turn out that the candidate has not properly examined and understood essential elements and issues, which means that his or her input is not well-founded.
If there are any problems threatening the continuity of the enterprise, board members must be able to look beyond their own portfolio and have a vision that covers a broader perspective.
Suitability within the board as a whole
DNB also considers a candidate's suitability in relation to the composition and quality of the board as a whole. Institutions must submit a suitability matrix for each screening: this provides an overview of the knowledge and experience that is present in the management board or supervisory board as a whole, covering all subjects referred to in the Policy Rule on Suitability 2012. New members should be able to fill any knowledge and experience gaps. Age diversity can play a role too. If the average age of supervisory board members is relatively high, DNB may request the institution to propose a younger candidate.