New fit and proper circular from BaFin
The German Federal Financial Supervisory Authority (BaFin) is consulting on a new circular on members of management, administrative, and supervisory bodies in accordance with the German Banking Act (KWG) until mid-June 2025. The circular is based on the two leaflets on executives and members of administrative or supervisory bodies published in December 2020 and summarizes these. With the circular, BaFin is also incorporating two joint guidelines of the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) into its administrative practice.
Table of Contents
The consultation is reason enough to take a closer look at the requirements for the professional competence of members of the management bodies of KWG institutions. As in the past, BaFin imposes different requirements on members of the management board than on members of the administrative/supervisory body.
Requirements for managers
The requirements for managers (“GLM”) apply equally to GL representatives in the event of their absence.
The ideal solution: presumption of compliance
As before, BaFin regularly assumes that professional competence is present if a manager to be appointed has held a senior position for at least three years at an institution of a comparable type and size.
BaFin now also defines what it means by “senior management,” namely a position as a managing director or immediately below the management level with significant decision-making authority and power of representation both internally and externally. The candidate must have been involved in the overall management of the bank. Outstanding credit expertise is particularly important. Finally, the activity must also have been successful, although BaFin does not provide any further guidance on what it means by this.
Individual case-by-case assessment as hard work
If the presumption rule does not apply, the candidate’s professional competence must be demonstrated in detail. Depending on the individual case, this can involve considerable effort.
Theoretical knowledge
The necessary theoretical knowledge can be demonstrated through completed vocational training, degree programs, and courses. In its information sheet, BaFin refers in particular to degree programs in economics or law. BaFin also recognizes sufficiently broad professional experience.
Even in the case of specialists, such as IT experts, BaFin does not waive basic banking knowledge and, where applicable, even credit knowledge.
Management experience
The manager to be appointed must have sufficient management experience. This may well have been acquired in companies that are not institutions. The candidate must have exercised the management responsibility assigned to them independently and with decision-making authority. BaFin determines the specific requirements for management experience on a case-by-case basis, taking into account the size and importance of the institution and the nature of the position to be filled. Experience has shown that the standards set by BaFin in this regard are not excessively high.
Practical experience
In previous supervisory practice, the requirements for practical experience have been a much higher hurdle. This is unlikely to change after the publication of the circular. BaFin only takes into account experience gained at licensed institutions in the performance of activities at a high level in the hierarchy and with the relevant powers. Simply managing a specialist department, such as the legal department or a risk controlling unit, is generally not sufficient.
BaFin attaches great importance to experience with specific regulatory issues. It explicitly refers to lending business and risk management.
Associate membership of the management board as a golden bridge
Based on this administrative practice, direct promotion from an operational management position to the management board of an institution is often ruled out. In practice, it has proven effective to first appoint the candidate on an interim basis as an associate member of the management board with no voting rights but full speaking rights and no position within the management board, and then to postpone their “full appointment” accordingly.
Job and project descriptions to supplement the CV
Formalized CVs of the candidates must be attached to the notices of intention to appoint. There is usually no space for additional explanations of the experience gained in individual tasks and projects.
Particularly in the case of candidates who cannot claim the presumption of regularity, a mere listing of previous professional positions is often not sufficiently informative. Practical experience in particular is not adequately reflected. This can be remedied by supplementing the CV with a description of the candidate’s previous functions, tasks, and projects. This can be particularly beneficial for individuals from the consulting industry or (former) members of supervisory boards at institutions, as it can earn them considerable brownie points with the supervisory authorities.
Requirements for supervisory and administrative boards
The BaFin places far lower requirements on the expertise of supervisory and administrative bodies (“VAOM”). These must be professionally capable of adequately controlling and monitoring the management and actively supporting the development of the institution. The scope and complexity of the business conducted by the institution are decisive.
Expertise may be derived from activities in the banking industry, academia, public administration, or even politics. For employee representatives on supervisory boards or VAOMs with co-determination powers by virtue of public office, BaFin works with practical rules of presumption.
Ambitious catalog of necessary knowledge for all board members
The reference in the circular to the very extensive catalog in the EBA/ESMA guidelines of knowledge that all board members should have—albeit to varying degrees depending on the board to which they belong—appears ambitious.
According to these guidelines, management board members should be well versed in areas such as banking and financial markets, legal requirements and regulatory frameworks, risk management, including the identification, assessment, monitoring, control, and mitigation of an institution’s main types of risk and risk factors in the areas of the environment, social affairs, and governance, accounting and auditing, and ensuring effective corporate governance, supervision, and controls.
Suitability and diversity guidelines
To ensure that sufficiently suitable candidates are appointed to key functions, institutions should establish guidelines and processes for assessing individual suitability, including diversity criteria.
The list of skills that managers should possess, issued by the EBA and ESMA, is likely to be a necessary component of the suitability guidelines, at least in part. This list includes attributes such as authenticity, language skills, customer and quality orientation, teamwork, strategic acumen, and, last but not least, the ability to chair meetings.
