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Q&A on supervisory boards at payment institutions and electronic money institutions

Q&A
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Question:

What circumstances may cause a payment institution or an electronic money institution (EMI) to be required to establish a supervisory board for the purposes of ensuring sound and ethical operational management and a balanced and adequate organisational structure?

Published: 25 January 2024

Answer:

In some circumstances, DNB may see fit for a payment institution or an EMI to establish a supervisory board for the purposes of ensuring a clear, balanced and adequate organisational structure as referred to in Section 17 of the Dutch Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft – Bpr).1

In Section 3:17, the Dutch Financial Supervision Act (Wet op het financieel toezicht – Wft) stipulates that payment institutions and EMIs are to structure their governance processes such that sound and ethical operational management is guaranteed. Under Section 17 of the Bpr, a payment institution’s or an EMI’s business practices should, in particular, ensure that the institution has in place a clear, balanced and adequate organisational structure. In its explanatory memorandum accompanying Section 17 of the Bpr, the legislator explicitly stated that DNB is responsible for overseeing a clear, balanced and responsible system of management and supervisory functions at financial undertakings (corporate governance). The legislator also expressly stipulated that DNB has the power to impose specific requirements on the corporate governance of financial undertakings. Given that, by exercising internal supervision of the policies pursued by management and the general course of business at a payment institution or an EMI, a supervisory body can contribute greatly to a balanced corporate governance structure, certain circumstances may warrant the establishment of an independently operating supervisory board. In assessing whether a supervisory board should be established, DNB will consider all relevant circumstances, including the nature, scale, risks and complexity of the payment institution’s or EMI’s operations (principle of proportionality). DNB will also assess whether alternative solutions to establishing a supervisory board might be appropriate (principle of proportionality).

What follows is a non-exhaustive list of circumstances in which, in DNB’s opinion, a payment institution or an EMI may have to establish a supervisory board:

You can swipe the table to see more columns.

1. The institution has a director-majority shareholder/dominant shareholder (e.g. with a majority interest or substantial minority interest, or specific special rights)

If an institution has a majority or dominant shareholder, there is a risk of the decision- making process being dominated by that shareholder, as a result of which their part interest will take precedence over other part interests in the institution. This is when it is particularly important that the interests of all stakeholders in the payment institution or EMI are appropriately safeguarded. By being assigned a role in the decision-making process, an independently operating supervisory board can exercise countervailing power, as part of which it is expected to carefully weigh all part interests in the institution, making allowance for group interests as well as external interests, such as those of creditors of the payment institution or EMI.

2. The internal control structure is weak

An institution’s internal control structure qualifies as weak if a single officer is responsible for multiple internal control functions (e.g. compliance and risk), if control functions have been outsourced, or if members of the management body wear dual hats (e.g. risk and sales, or finance and risk).
Although weaknesses in the internal control structure are to be mitigated first and foremost by the management body and in the internal control structure itself, a supervisory board can be instrumental in driving this effort, the reason being that it is responsible for supervising the system of management functions, including internal control. Supervisory board involvement in the internal control structure can promote risk awareness and risk management within the institution. This is how a supervisory board will help an institution to maintain an adequate and balanced organisational structure.2
3. The institution has a complex organisational or control structure

A payment institution or an EMI has a complex organisational or control structure if its managing directors fulfil dual-hat roles within the group of which the institution is a member, if there is a risk of the formal control structure not corresponding to the effective control structure, and if the members of the group are in the habit of outsourcing services or functions to each other.

Managing directors with dual-hat roles within a group may experience conflicts of interest, for instance if they fulfil roles at both the payment institution or EMI and the parent institution, and the payment institution or EMI and the parent institution have conflicting interests. Also, two managing directors of a payment institution or an EMI may not be able to operate entirely independently of each other because they fulfil roles at the parent institution that cause them to have a hierarchical relationship. The presence of a complex organisational or control structure may pose a risk to ensuring sound and ethical operational management, potentially resulting in conflicts of interest. These risks can be mitigated by having in place a supervisory board, as it is responsible for overseeing the adequate organisational and control structure of the payment institution or EMI (including adequate allocation of duties and responsibilities, prevention/management of conflicts of interest, and assessment of gaps between formal and effective governance) as well as the institution’s compliance with the relevant legislation and regulations. This is how a supervisory board will help an institution to maintain an adequate and balanced organisational structure.

DISCLAIMER
Q&As provide further insight into DNB’s policy practice by setting out its interpretation of statutory supervisory rules. Institutions are free to opt for alternative ways in which to meet the statutory and regulatory requirements provided that they apply the comply-or-explain principle. To learn more about the status of DNB’s policy statements, go to the Explanatory guide to DNB’s policy statements on Open Book on Supervision.

1 Banks, insurers and clearing institutions are required, under Section 3:19 of the Dutch Financial Supervision Act (Wet op het financieel toezicht – Wft) to establish a supervisory board. Payment institutions and EMIs are not governed by this provision. The Dutch Civil Code (Burgerlijk Wetboek – BW) does not force payment institutions and EMIs to establish a supervisory board either, unless they have adopted the two-tier regime.

2 Establishment of a supervisory board will not, of course, serve to ‘offset’ violations of statutory and regulatory requirements. Institutions are expected to meet the relevant statutory and regulatory requirements at all times.

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