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24 June 2019 Supervision Supervision label Q&A

Good governance is an essential component of a sound and ethical financial sector, and the supervisory board, which fulfils a supervisory and advisory role, can deliver a vital contribution to this. In 2018, ESMA and EBA published their joint “Guidelines on the assessment of the suitability of members of the management body and key function holders” (Joint Guidelines).

We have amended our opinion on the independent functioning of the supervisory board on a number of points to ensure coordination with the Joint Guidelines. For example, we have amended the criteria for establishing a supervisory board member's formal independence, and we have specified the conditions for situations in which we may permit a smaller number of formally independent supervisory board members.

To ensure that the same criteria apply to all financial sector enterprises, we will apply our opinion – where relevant – to all financial institutions subject to our direct supervision1.

Legal basis

The Financial Supervision Act (Wet op het financieel toezicht – Wft) stipulates that financial institutions must set up their operational management to safeguard sound and ethical business operations (Section 3:17 of the Wft). A supervisory board can deliver a major contribution to this by supervising the policies established by the management board and the general course of business at an institution. In addition, it supports the management board by providing advice (Section 140/250 of Book 2 of the Dutch Civil Code). The supervisory board members must always act in the interest of the institution and its business.

Pursuant to Section 3:8 of the Wft, a supervisory board or body with a comparable mandate must consist of members that are fit to fulfil this supervisory function.

DNB, the AFM and the ECB perform fitness assessments. In order to supervise the management board's policies and the general course of business at an institution, the supervisory board members must be able to make sound, objective and independent decisions and form opinions in a fully autonomous manner. Accordingly, the ability to independently fulfil the duties and responsibilities of a supervisory board member is an important consideration in the fitness assessment. Below is a more detailed explanation of what we mean by an independently functioning supervisory board.

Independence of mind

All supervisory board members should be able to act with independence of mind. It is a pattern of behaviour, shown in particular during discussions and decision-making within the supervisory board. Supervisory board members must have the courage, conviction and strength to effectively assess and challenge the management board's policies and proposed decisions without being led by group thinking.

They must not have conflicts of interests to an extent that would impede their ability to perform their duties independently and objectively. They must also actively prevent any potential conflicts of interests (“independence in appearance”). We use the criteria from the Dutch Corporate Governance Code and the Joint Guidelines to assess whether a supervisory board member is involved in an actual or potential conflict of interests. The supervisory board must have a policy in place to address and manage actual and potential conflicts of interests. If a supervisory board member has a direct or indirect personal interest that conflicts with the interests of the institution, that member may not be involved in the consultations and decision-making process (Section 140/250(5) of Book 2 of the Dutch Civil Code)

Formal independence

In addition to the supervisory board members acting with independence of mind, the supervisory board as a whole must consist of a sufficient number of formally independent members (“independence in state"). A formally independent member of the supervisory board does not have any present or recent past relationships or links of any nature with the institution or its management board that could influence the member’s objective and balanced judgement. We use the criteria from the Joint Guidelines to assess whether a supervisory board member can be considered formally independent. These criteria are mostly in line with the criteria from the Dutch Corporate Governance Code. The criteria set in the Joint Guidelines are stricter on two points: i) according to the Joint Guidelines, a supervisory board member who is also a management board member within the same group company is not regarded as formally independent, and ii) a supervisory board member who has been a Management or supervisory board member of the institution supervised by the supervisory board for twelve years or more, is not regarded as formally independent.

Our policy that at least half of the number of members of the supervisory board must be formally independent remains unchanged. From a proportionality perspective, non-listed subsidiary entities are permitted to have only one formally independent supervisory board member if the following three conditions are met:

  1. The subsidiary entity holds a licence and its parent company has its registered office in the same country (i.e. the Netherlands).
  2. The subsidiary entity is subject to consolidated supervision or group supervision.
  3. The subsidiary entity provides the same service as its parent company.

We decide whether these conditions have been met and whether the supervisory board is permitted to have only one formally independent member. In this context, it should be noted that an insurance company does not provide the same service as a bank. This means that at least half of the number of members of the supervisory board of an insurance company's banking subsidiary, or conversely, of the supervisory board of a bank's insurance subsidiary must be formally independent.

Implementation

Institutions must ensure they comply with the provisions of our amended opinion on the supervisory board's independent functioning by 1 January 2023. In principle, in new assessments non-formally independent members will be considered unfit from now on until the requirement concerning the minimum number of formally independent supervisory board members has been met. If an institution does not meet the requirement concerning the minimum number of formally independent supervisory board members when appointing a new supervisory board member, it must submit a succession plan specifying how it intends to meet the requirement by 1 January 2023.

Q&As

Can an insurance group's supervisory board member who is also a member of an affiliated cooperative or a customer of a group company be regarded as formally independent?

Provided this relationship does not influence the supervisory board member’s objective, independent and balanced judgement, they will still be regarded as formally independent.

What are the criteria for assessing whether the subsidiary of an insurance holding company or a mixed insurance group provides the same service as its parent company?

The following criteria apply for assessing whether the subsidiary of an insurance holding company or a mixed insurance group provides the same service as its parent company:

1.If 80% of more of a holding company's liabilities are insurance liabilities, it is commonly considered an insurance holding company. In that case, the subsidiary is assumed to provide the same service as the parent company, which means it is permitted to have only one formally independent supervisory board member on the supervisory boards of the entities in the insurance group, provided the other two criteria are also met.

2.If less than 80% of a holding company's liabilities are insurance liabilities, the group is commonly considered a mixed insurance group. In that case, the subsidiary is assumed not to provide the same service as the parent company, which means that at least half of the number of members of the supervisory board must be formally independent.

What is DNB's take on concurrent supervisory board memberships in an insurance group or mixed insurance group?

A formally independent supervisory board member can be considered formally independent in multiple supervisory boards in an insurance group or mixed insurance group. This means that a formally independent member of an insurance holding company's supervisory board can also be a formally independent member of an insurance subsidiary's supervisory board, provided the criteria for formal independence are met.

EMIR and CSDR use different standards for the minimum number of independent supervisory board members. Accordingly, CCPs and CSDs fall outside the scope of our amended opinion.

For payment processing service providers, it is also sufficient if at least one third (33.33%) of the supervisory board consists of formally independent supervisory board members, provided the payment processing service provider concerned has put in place a user committee to safeguard the interests of the users and end users as regards the proper functioning of the payment system.

sector

  • Banks
  • Clearing institutions
  • Electronic money institutions
  • Insurers
  • Payment institutions