Statutory governing body

  1. Banking Law: Articles 23, 31, 36, § 2, 56-58, 60, § 3 and 62/1
  2. Relevant thematic NBB circulars:
    • Circular NBB_2021_28 of 16 November 2021 transposing Guidelines EBA/GL/2021/05 of 2 July 2021 on internal governance
    • The NBB’s Fit & Proper Manual
    • Circular NBB_2021_27 of 16 November 2021 transposing Guidelines EBA/GL/2021/06 of 2 July 2021 on the assessment of suitability
    • Communication NBB_2021_04 of 19 January 2021 on the HIVE project and the digitalisation of the fit and proper process
    • Communication NBB_2018_05 of 8 February 2018 on the report of the statutory governing body on assessment of the compliance function
  3. International reference documents:
    • Guidelines EBA/GL/2021/05 of 2 July 2021 on internal governance => paragraphs 20 to 27 and 31 to 33
    • BCBS Principles: principles 1 to 3

Composition

Members and status

The statutory governing body is composed of non-executive directors and executive directors (i.e. members of the management committee or of senior management). In order to safeguard the supervisory function of the statutory governing body, the majority of members should be non-executive directors and the chairs of the statutory governing body and of the management committee must be two different persons. The chair of the statutory governing body must be a non-executive director.

The size of the statutory governing body must be determined taking into account the nature, scale and complexity of the institution’s activities, its internal organisation and its capital structure. It should be sufficiently small to allow for effective decision-making, but large enough to ensure that directors bring experience and knowledge from fields relevant to its proper management and that its composition can be changed without causing undue disruption, in order to ensure continuity.

In accordance with Article 19 of the Banking Law, the (executive and non-executive) members of the statutory governing body must be natural persons.

In terms of social status, a directorship of an institution may not be exercised within the framework of an employment contract (this mandate must be performed under the social status of self-employed) and a combination of two statuses (self-employed and employee) within the same institution or a company in which the institution has a holding is incompatible with the principles of sound governance applicable to credit institutions[1] (Article 62/1 of the Banking Law). However, exceptions are possible if the institution is required to comply with obligations under foreign law that require the presence of employees in the statutory governing body.

 

Independent directors within the meaning of Article 3, 83° of the Banking Law

The independent non-executive directors should specifically ensure that the decision-making process takes into account the interests of all the institution’s internal and external stakeholders, including of minority shareholders, depositors, investors, etc. In this way, the independent directors contribute to the supervision of management.

Pursuant to Article 27 of the Banking Law, institutions that are required to establish an audit committee, a risk committee, a remuneration committee and a nomination committee must ensure that each of these committees includes at least one independent director. Furthermore, a majority of members of the audit committee should be independent.

Prior to the entry into force of the CAC, the Banking Law referred to Article 526ter of the former Companies Code for the concept of independent director and the criteria they had to meet. These elements are now included in Article 3, 83° of the Banking Law, with reference to the criteria set out in Guidelines EBA/GL/2021/06. Failure to meet one of the independence criteria does not automatically mean that the person concerned can no longer be considered independent. The institution has the possibility to demonstrate to the supervisory authority that, although not all criteria have been met, the independence of the person concerned is not compromised (application of the “comply or explain” principle). In this case, the institution should submit a request for exemption. The competent supervisory authority (ECB/NBB) must then decide whether or not to grant this request[2].

 

Selection of directors – suitability and diversity

Directors should at all times be of sufficiently good repute and have adequate expertise, both individually and collectively, for the performance of their duties.

Specifically, directors should: (i) be of sufficiently good repute; (ii) possess sufficient knowledge, skills and experience to perform their duties; (iii) be able to act with honesty and independence of mind; (iv) be able to commit sufficient time to perform their functions (and in the case of a significant institution, not exceed the maximum number of external functions permitted by the Banking Law); and (v) contribute to the collective suitability of the statutory governing body and, where appropriate, of the management committee.

With regard to collective suitability, the statutory governing body should at all times possess adequate knowledge, skills and experience to be able to understand the institutions’ activities, including the main risks to which it is exposed[3]. In terms of the areas of competence to be represented in the statutory governing body, please refer to the NBB’s Fit & Proper Manual, with the understanding that the NBB pays particular attention to the following areas of collective suitability: information technology and security, management of climate and environmental risks, and management of risks related to money laundering and terrorist financing.

The composition of the statutory governing body should also reflect a diversity of genders, educational and professional backgrounds, ages and - for institutions that are active internationally - geographical provenance. Indeed, having a range of backgrounds, experiences, values, opinions and views in the statutory governing body improves the decision-making process for strategies and risk-taking within the institution. The promotion of diversity is anchored in the Banking Law. For instance, Article 31 of the Banking Law obliges institutions to use diversity as one of the criteria for the composition of the statutory governing body and to draw up a diversity policy that at least refers to the above aspects.

In the area of gender diversity in particular, the Banking Law considers gender balance of particular importance for ensuring adequate representation of society in the governing bodies of institutions. In this regard, the said law provides for the setting of a target for the representation of the underrepresented gender in the statutory governing body of the institution and for the development of a plan to increase the number of representatives of this gender in order to reach the target. The target should be quantitative (percentage of targeted participation of the underrepresented gender) and defined for the statutory governing body collectively. If the management committee is large enough, the target may be split between the statutory governing body and the management committee. This target, the aforementioned plan and its implementation modalities must be made public in accordance with Article 435(2)(c) of Regulation No 575/2013 and disclosed to the NBB/ECB. When setting diversity objectives, institutions should consider the diversity benchmarking results published by the EBA.

As part of the annual review of the composition of the statutory governing body, institutions should document their compliance with the objectives and targets set. In the event that diversity objectives or targets have not been met, institutions should document the reasons why, the measures to be taken and the timeframe for measures to be taken, in order to ensure that the diversity objectives and targets will be met.

 

Chair of the statutory governing body

The chair of the statutory governing body should lead the statutory governing body, contribute to an efficient flow of information within the statutory governing body and between the statutory governing body, its specialised committees and the management committee, and should be responsible for its effective overall functioning. For further information on the specific tasks of the chair, please refer to paragraphs 35 to 39 of Guidelines EBA/GL/2021/05.

Tasks

Article 23 of the Banking Law provides that the statutory governing body holds the general responsibility for the institution. It does so in particular through the two functions described below.

 

General policy function

The main task of the statutory governing body is to establish the institution’s strategy and general policy.

The statutory governing body is expected to set the strategy and orientation of the activities, inter alia as regards commercial policy and structures, the granting or carrying out of investment services and activities and ancillary activities, risk profile, risk policy and risk management, capital adequacy, outsourcing, business continuity, integrity, customer acceptance, conflicts of interest and protection of the rights of customers on their assets held by the institution.

The statutory governing body determines the risk tolerance of the institution for all its activities. It should be primarily responsible for taking strategic decisions with regard to risks and should be closely involved in the ongoing monitoring of the development of the risk profile of the institution. Therefore, the statutory governing body, where appropriate through the audit and risk committees, should at all times possesses relevant and comprehensive information on the risks of the institution.

Furthermore, when setting out its risk management policy, the statutory governing body should formally establish the (qualitative and/or quantitative) criteria that determine whether or not transactions, in particular credit transactions, constitute a credit or counterparty risk that should be deemed major. The statutory governing body should be notified of these transactions and the associated major decisions (e.g. an extension or a modification of essential contractual credit terms) in a timely manner, allowing it, where applicable, to oppose them beforehand.

The statutory governing body should also approve the liquidity recovery plan.

For further information on the tasks of the statutory governing body, please refer to the Banking Law and to paragraphs 22 to 27 of Guidelines EBA/GL/2021/05.

 

Supervisory function

The supervision of the business and the regular assessment of the governance structure, the organisation and the internal control mechanisms of the institution are the second important pillar of the responsibilities of the statutory governing body.

In accordance with Article 56 of the Banking Law, the statutory governing body must periodically, and at least once a year, assess the effectiveness of the institution’s organisational structure. In addition, it must periodically monitor and evaluate the appropriateness and implementation of the institution's strategic objectives in relation to the provision of investment services, the conduct of investment activities, the provision of ancillary services, and the marketing of and advice on structured deposits.

The statutory governing body should also assess the proper functioning of the independent control functions. In addition to the assessment that it can perform based on its regular contacts and the information provided to it by these three functions, the statutory governing body should rely in particular on the periodic report of the management committee. It should also ensure that the management committee takes the necessary measures to remedy any shortcomings. The statutory governing body provides the supervisory authority with an annual report on the assessment of the compliance function, in accordance with Article 36, § 2 of the Banking Law.

The responsibility for the supervision of the institution’s operations lies with the statutory governing body in its supervisory function and, in particular, with the non-executive directors who form the majority of this body. This supervision may be exercised in particular in the following ways:

  • reporting by the independent control functions;
  • effective use of the investigative powers vested in the members of the statutory governing body;
  • reporting on the development of the institution’s business by the management committee to the statutory governing body; and
  • exercising its right to access the information and documents needed to carry out its tasks, for instance the minutes of the management committee[4].

The exercise of this supervision also presupposes that information and proposals formulated by members of the management committee and senior managers are critically evaluated, and if necessary challenged, to ensure that decisions are made with full knowledge of the facts.

For further information on this subject, please refer to paragraph 34 of Guidelines EBA/GL/2021/05.

Functioning

The statutory governing body is a collegial body. In accordance with Article 31 of the Banking Law, the nomination committee should ensure that the decision-making of the statutory governing body is not dominated by any one individual or small group of individuals in such a way as to cause damage to the interests of the institution as a whole.

The minutes of the meetings of the statutory governing body must summarise the discussions held, record the decisions taken and specify the questions and divergent views expressed by directors, in accordance with principle 3.8 of the Code on Corporate Governance published by Royal Decree of 12 May 2019.

The statutory governing body must adopt internal rules of procedure[5] describing its composition, tasks and functioning. The NBB recommends that these internal rules of procedure be annexed to the governance memorandum.

The statutory governing body must meet with sufficient regularity to carry out its duties effectively. It is recommended that a strategy meeting be held at least once a year.

The statutory governing body should regularly assess the functioning of the governance structure, including the powers, composition, size and number of meetings of the governing bodies, as well as the individual attendance of directors. External facilitators may be used to carry out this assessment. In accordance with Article 31 of the Banking Law, the nomination committee also has an important role to play in this respect. The NBB’s Fit & Proper Manual and Guidelines EBA/GL/2021/06 specify the situations in which the individual or collective suitability of members of the statutory governing body should be reassessed.

The non-executive directors should assess their interaction with the executive directors at least once a year, where appropriate in the absence of the latter. Minutes should be drawn of the conclusions of these assessments, as well as of the measures taken in order to improve the functioning of the governance structure.

The institution should inform the supervisory authority of any distribution of tasks between the members of the statutory governing body.

The members of the statutory governing body must receive induction and training in accordance with paragraphs 95 to 101 of Guidelines EBA/GL/2021/06. This training must enable them to have a clear understanding of the relevant laws, regulations and administrative provisions, the institution’s structure, business model, risk profile[6] and governance arrangements, as well as their role. In accordance with Article 56, § 3, second paragraph of the Banking Law, the statutory governing body ensures that the institution dedicates sufficient human and financial resources to the ongoing training of its members. Please refer to the NBB’s Fit & Proper Manual for further information on this subject.

[1] These principles include independence of mind, collegiality in the statutory governing body, etc.
[2] The supervisory authority generally decides simultaneously on both the suitability of the person concerned and on the request for exemption from one of the criteria of Article 3, 83° of the Banking Law. However, it cannot be ruled out that these decisions are taken separately if the issue of independence has a broader scope and implications for sound governance.
[3] The monitoring of collective suitability falls under both sound governance and fit & proper supervision (collective suitability being one of the aspects of the notion of adequate expertise).
[4] See Article 56, § 1, third paragraph of the Banking Law. The minutes of the management committee must be made available to all directors via a secure IT tool.
[5] Internal regulations that do not necessarily have to meet the conditions of Article 2:59 of the CAC.
[6] Including in relation to environmental and climate risks.