CRD VI Governance: EU Requirements and Harmonization
The financial services industry in the European Union (EU) is undergoing a significant change with the enactment of Capital Requirements Directive (“CRD”) VI. This new directive aims to harmonize corporate governance rules across EU Member States, bringing about a shift in requirements for management and governance. The main focus of CRD VI is to adopt fit and proper rules outlined in the existing European Banking Authority (“EBA”) guidance. This change represents a significant adjustment for many countries, particularly those with previously less prescriptive rules.
Before the introduction of CRD VI, there was a lack of EU-wide harmonization when it came to the qualifications required for corporate managers. Each Member State had its own set of rules, making it challenging for financial institutions to comply with varying requirements. CRD V placed the responsibility on financial institutions to assess compliance with individual Member States’ provisions, leading to inconsistencies in the criteria for assessing the suitability of managers.
With the implementation of CRD VI, there is now a course correction towards harmonizing qualification criteria into EU-wide requirements for the corporate management body. This includes incorporating existing EBA guidance on fit and proper requirements. While some Member States already align with these rules, others will need to make significant changes to comply with the new directive.
The definition of the “management body” has been broadened under CRD VI to include all individuals who effectively direct the business. This encompasses not only the management board but also the CEO, members of executive committees, and other senior managers responsible for executive management. The management body now extends beyond the traditional governance bodies outlined in national laws, ensuring a more comprehensive approach to corporate governance.
Article 91 of CRD VI sets new standards for the appointment of managers, emphasizing the importance of skills, experience, reputation, honesty, and integrity. Financial institutions and supervisory authorities are tasked with assessing the suitability of management body members and must inform the competent authority of any new developments that could affect their suitability. The induction and performance of functions of the management body are now subject to additional duties, with noncompliance potentially leading to the removal of managers.
The composition of the management body must reflect the knowledge, skills, and experience necessary to fulfill its responsibilities. Newly appointed members are required to receive key information regarding the institution’s structure, business model, risk profile, and ESG factors. Continuous learning and skill development are essential for managers to stay up to date with policies and procedures and adapt to external factors.
The ongoing performance of managers is a key focus of CRD VI, with requirements such as committing sufficient time to duties, limiting the number of directorships held, and ensuring adequate knowledge, skill, and experience for their responsibilities. Additionally, Article 91a of CRD VI outlines governance requirements for other key function holders within companies who have a significant influence without being part of the management body.
In conclusion, CRD VI brings about a fundamental shift in the governance requirements for the financial services industry in the EU. By harmonizing qualification criteria and expanding the definition of the management body, the directive aims to enhance corporate governance practices and ensure the suitability of managers. Financial institutions and supervisory authorities must adapt to these new requirements to promote transparency, integrity, and accountability within the sector.
