On 22 September 2021, Switzerland's financial regulator FINMA published a practical Guidance, which lays out its criteria for conducting fit and proper tests when assessing candidates under consideration for or persons in charge of upper-level management positions within a bank (i.e. board members and C-level executives).
The following article provides practical insights on key aspects of the FINMA Guidance.
The concept of "body" or "organ" refers to persons or group of persons entrusted with the administration and management of a bank. Strictly speaking, holders of qualifying holdings are not organs, although they also are subject to FINMA scrutiny (particularly, regarding 'properness'). In principle, the Guidance concerns members of banking bodies in charge of:
- senior and strategic management (typically, the board of directors); and
- executive management (i.e. the executive committee).
Principles of fit and proper test
In the Guidance, FINMA summarises the two general principles it applies when performing its reviews and emphasises that they assess:
- the suitability of the person to perform the contemplated function (i.e. fitness); and
- the individual's integrity (i.e. properness).
These "fit and proper tests" are well known in the industry. Every person considered for a top-level management position within a bank is subject to a fit and proper clearance prior to taking up duties.
The Guidance also outlines the difference between the "fit" and the "proper" aspects of the assessment and explains that, while the evaluation of integrity (i.e. properness) is carried out autonomously by FINMA, the assessment of competence (i.e. fitness) takes into account the bank's own assertions on the professional competence of the contemplated candidate, and the internal selection process conducted by the bank.
In the process, FINMA may ask for additional details and propose, or even impose, additional requirements depending on the person's background or the bank and its structure. FINMA's assessments are based on the general principles of administrative law, particularly, the principle of proportionality. In its assessments, FINMA takes into account the bank's size, complexity, structure, activity and exposure to risk.
In accordance with the above principles, any decision to reject a new member of the relevant body may be subject to appeal. As a rule, if the examination produces a negative result or FINMA's approval is subject to special conditions, the supervising authority will contact the institution before rending its decision.
Finally, according to the Guidance, when a member of the management or executive body is relieved of responsibilities, the institution can simply notify the supervising authority. In that case, however, whether the circumstances are a departure or change of function, the affected body as a whole (i.e. in corpore) must continue to discharge its duties within the institution. Furthermore, the departure or change of function within the management body or the board may have a different impact on the bank depending on its size and structure. Therefore, before launching the notification process with FINMA, banks should conduct a proper internal assessment of the risks and consequences that potential gaps may face following the departure of a key member or a change in function.
Preliminary review by FINMA
In special circumstances and in exceptional cases, at the request of the institution, FINMA can also perform an informal preliminary examination provided that the full documentation package on the case at hand has already been submitted. The Guidance gives a few examples of circumstances that could warrant such preliminary reviews by FINMA, including:
- ad hoc publicity in the case of a stock exchange listing;
- a complex selection process involving various stakeholders (as is the case of cantonal banks); or
- the need to examine several possible candidates on a preliminary basis.
The preliminary review does not predetermine FINMA's final decision on the merits.
FINMA's assessment criteria
Furthermore, the Guidance provides a useful overview of the criteria, on which FINMA bases its analysis of the candidate's integrity and professional competence.
To assess the integrity of the person under consideration for the post, FINMA inspects the individual's curriculum vitae. If a corporate body is changing in size, FINMA examines whether the new composition complies with the legal rules, Articles or organisational regulations and with the mandatory requirement for separation of duties within the bank.
To assess a candidate's fitness, FINMA again reviews the candidate's curriculum vitae with the view of establishing whether the individual has the necessary knowledge and experience for the role. Prospective members of audit or risk committees undergo particular scrutiny. If the candidate has other mandates and side activities, FINMA will examine whether or not the individual will be able to devote sufficient time to the function, and will assess potential risks of conflicts of interest and how the bank intends to deal with them.
Other useful information
In addition, the Guidance includes details on how banks can access FINMA's assessment procedure (via FINMA's electronic platform EHP), and indicates an approximate processing time of around ten working days. The Guidance also contains a list of information that FINMA expects to receive on the applicant and the bank (e.g. "B forms", criminal records and other usual documents, including the position of the candidate in the bank's organisation chart).
The recently published Guidance is a faithful reflection of FINMA practices. It is worth noting that the principles and requirements outlined in the Guidance are neither new nor extraordinary, but rather common among supervisory authorities. However, this release is a welcome reminder of those practices, and the notes it provides on the review process are particularly useful. While the publication is primarily intended for banks, the principles it contains are not without relevance for other Swiss supervised institutions.
For more information on this Guidance and the banking regulations in Switzerland, contact your CMS client relationship partner or your local CMS expert: