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?
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:
|
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). |
| 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.
Embedded finance offers customers the convenience of in-app payment options and on-the-spot insurance. This seamless integration of financial services, available exactly when and where they are needed, makes life simpler. But this innovation also entails new risks.
Read more Embedded finance: striking a balance between convenience and risk in the digital economy
On Tuesday 28th May from 3:00-4:45 PM CET DNB will organize an online information session about fit and proper assessments.
Read more Information session about fit and proper assessments DNB
The rapid development of artificial intelligence (AI) poses challenges for the supervisory work of the AFM and DNB. The supervisory authorities have published a report with criteria and areas of attention for shaping the supervision of AI.
Read more AFM and DNB publish report on the impact of AI on the financial sector and supervision
How does one bring the professional oath to life in daily practice? Representatives from the financial sector and the supervisory authorities tackled this question at the DNB seminar on the professional oath in late 2022.
Read more The professional oath in daily practice
