What to consider when preparing for a suitability assessment?

The suitability assessment of a member of the management body is a crucial part of a financial institution’s licensing process. The suitability assessment should also be performed in other cases when a person is elected or appointed as a member of the management body of a financial institution. For certain financial institutions, such as credit institutions, the suitability assessment should also be carried out for other key positions (e.g., risk manager, compliance officer, internal auditor). While the suitability assessment may initially seem a straightforward process, requiring only submission of essential information and documentation, it is, in practice, a substantive procedure that requires thorough preparation and attention to various practical nuances.

Knowledge, skills, and experience

As part of the suitability assessment, it should be analysed and demonstrated how the education of the individual supports the position as a member of the management body of the financial institution. Completion of relevant training contributes significantly to the assessment of the individual’s knowledge and skills, especially when their education is not specifically relevant to the position. Therefore, it is important to review the completed trainings and list them in the documentation.

Previous experience in the financial sector is also a critical aspect of the suitability assessment. Hence, it should be assessed how the previous experience of the individual relates to the position of the member of the management body and its areas of responsibility. The collective suitability of the management body plays also an important role here. Therefore, in some cases a general prior experience in the financial sector may be sufficient. This would be the case where it is possible due to the areas of responsibility of the member of the management body and if the management body collectively has sufficient experience to cover other areas of responsibility. However, in other cases the areas of responsibility of the member of the management body require experience in specific financial services (e.g., payment services). Conversely, the area of responsibility of the member of the management body may also be a justification why previous experience in the financial sector is not vitally important. This would the case whereby such individual contributes to the management body with specific knowledge and experience (e.g., IT).

Impeccable business reputation and integrity

During the suitability assessment, the individual is also obliged to disclose any legal or administrative offences (including speeding fines), past business performance (e.g., company reorganizations or bankruptcies), or any other circumstances which may affect their reputation and integrity. The seriousness of these circumstances will determine their impact on the suitability of the individual. For example, a speeding fine does not automatically make the individual unsuitable. It is therefore important to assess and demonstrate that the individual’s reputation and integrity are such that there are no doubt in his suitability to act as the member of the management body.

Absence of conflicts of interest and independence

During the suitability assessment it should also be identified whether there are any circumstances that could give rise to conflicts of interest and therefore could affect the independence of the individual. In such case it should be assessed that the conflicts of interest is not relevant or such risk is unlikely. Measures to avoid conflicts of interest should be considered and explained if there is potential conflicts of interest. If sufficient measures are taken, the individual may still be suitable for the position.

Commitment of time

The member of the management body should have sufficient time to perform his duties. The requirements to the commitment of time differ significantly between the management and the supervisory board members. Time devoted to the position as the member of the supervisory board is very limited. Therefore, issues in relation to sufficient time commitment arise rarely and only in situations where the individual holds several different positions. However, the members of the management board should generally contribute full-time. Due to that the question of sufficient time commitment is typical for the se individuals who take up a position as the member of the management board but are at the same time occupied on another position. Hence, it is important to assess and demonstrate adequate time commitment for each position and make necessary adjustments, if necessary.

Collective suitability of the management body

In addition to assessing the individual suitability of each member of the management body, it is important to evaluate the management body as a whole. Each member’s knowledge, skills, and experience contribute to the collective suitability of the management body. This allows the assessment of knowledge, skills and experience to be based on collective suitability according to the division of areas of responsibility. Negative reputation and conflicts of interest of each individual member of the management body shall impact the board as a whole and cannot be offset by the suitability of other members.

The suitability of the member or the entire management body can significantly hinder the licensing process and have negative consequences when operating as the financial institution. Therefore, thorough preparation for the suitability assessment, considering all relevant factors, is essential.

The article was written by Ellex experts Anneli Krunks and Marion Müürsepp.