Opinion of the European Central Bank of 27 June 2023 on the introduction of a banking oath and certain supervisory and resolution matters (CON/2023/17)

OPINION OF THE EUROPEAN CENTRAL BANK of 27 June 2023 on the introduction of a banking oath and certain supervisory and resolution matters (CON/2023/17) Introduction and legal basis

On 12 May 2023 the European Central Bank (ECB) received a request from the Belgian Minister for Finance for an opinion on a draft law containing various financial law provisions, including, inter alia, provisions concerning a banking oath and a disciplinary regime for persons working for credit institutions, and the adaptation of Belgian law to EU regulations concerning the resolution of central counterparties and a pan- European personal pension product (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union (TFEU) and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to the Nationale Bank van België/Banque Nationale de Belgique (NBB) and the ECB’s tasks concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Banking oath and disciplinary regime for persons working for credit institutions

1.1 Purpose of the draft law’s provisions on the banking oath and disciplinary regime 1.1.1 The draft law amends a Belgian law of 2019 to establish a banking oath and a disciplinary regime for persons who are working for credit institutions and intermediaries in banking and investment services, and who have a function linked to banking services. As noted in the explanatory memorandum accompanying the draft law , the Law of 2019, which has not yet come into force, formed part of the Belgian legislative response to the financial crisis in light of the lessons learned, particularly in view of the impact of the crisis on public confidence in the banking sector. The draft law pursues the same objective but modifies some features of the original regime. 1.1.2 The disciplinary regime introduced by the draft law applies to, among others, persons already subject to a fit and proper assessment by the NBB or the ECB. Any concerned person must take

an individual oath when they begin their function and follow a code of conduct when exercising their function. The Financial Services and Market Authority (FSMA) would, after consulting the NBB, adopt a regulation specifying the practical modalities of the individual declaration, and a Royal Decree would be adopted specifying the code of conduct that must be complied with. This code of conduct would impose general obligations and list prohibited behaviours. 1.1.3 The FSMA is the main competent authority ensuring compliance with the code of conduct. Pursuant to the draft law the FSMA is given powers of inquiry into any claim it receives or any information it discovers when exercising its competences. Specifically, if the FSMA is made aware of a potential breach of the code of conduct, the FSMA auditor is to conduct an inquiry. If the inquiry concerns a person working in a credit institution who is subject to a fit and proper assessment by the NBB or the ECB, the FSMA is to inform the NBB accordingly. The draft law specifies that the auditor exercises its function while respecting all rights of defence. 1.1.4 At the end of the inquiry, the auditor drafts a preliminary report and sends it to the person covered by the report, who is entitled to provide comments or to request additional instruction acts, both within a period of one month. If the auditor decides against proceeding with the requested additional instruction acts, this must be justified in the auditor’s final report. 1.1.5 The disciplinary regime introduced by the draft law also applies to persons who are not already subject to a fit and proper assessment by the NBB or the ECB, and the draft law provides that the FSMA is the competent authority to impose sanctions on such persons. Whereas the FSMA is not competent to impose any sanction if a report of the FSMA auditor pursuant to the draft law concerns a person already subject to a fit and proper assessment by the NBB or the ECB. In such a case, the FSMA is to share the final report with the NBB. If the report concerns a person working in a significant institution that is subject to prudential supervision by the ECB within the framework of the Single Supervisory Mechanism (SSM), the NBB is to forward the report to the ECB. When receiving the report, the NBB or the ECB, as the case may be, may at its sole discretion, decide to use it or not within the framework of the competences it already has, including the fit and proper assessment. 1.1.6 As noted in the explanatory memorandum, disciplinary actions taken by the FSMA are to be without prejudice to the supervisory powers of the NBB and the ECB, in particular as regards the exclusive powers of the NBB and the ECB under Council Regulation No 1024/2013 (hereinafter the ‘SSM Regulation’) with respect to fit and proper requirements. 1.2 Observations on the draft law’s provisions on the banking oath and the disciplinary regime 1.2.1 The ECB welcomes the measures envisaged by the draft law regarding the banking oath and disciplinary regime applicable to persons who work for credit institutions, and the fact that these measures are taken in the context of lessons learned from the financial crisis, in particular in view of its impact on public confidence in the financial sector, and more specifically in the banking sector. 1.2.2 Within the SSM, the FSMA’s reports will support suitability (re-)assessments by providing an additional source of information which will be taken into account when the suitability of an individual

is being (re-)assessed, in line with the ECB Guide to fit and proper assessments . The draft law’s measures will reinforce the governance framework of credit institutions. The behavioural patterns exhibited by persons having managerial functions linked to banking services, as well as the drivers that underpin that behaviour, are elements that determine how robust a credit institution’s governance framework is. It is imperative to adequately address unwarranted behaviour by individuals at a credit institution who decide to adopt a behaviour that would impact their professional honesty and integrity. If such acts have no apparent consequence, that will be noticed by staff in the credit institution, leading to the development of a new group norm. The overriding behaviour and culture within a credit institution are thus the product of both individual behaviour and the underlying culture that acts as a breeding ground for that behaviour. It is important for a credit institution to identify and be aware of the structures, beliefs and group dynamics which echo throughout the entire institution, and which may pose a risk to its performance and stability. Credit institutions’ management bodies should be attentive to these intangible but real underlying drivers of behaviour and, if warranted, acknowledge the need to shift the paradigm before it is too late and negative practices become the norm . 1.2.3 The ECB welcomes the fact that the explanatory memorandum expressly specifies that disciplinary actions of the FSMA are to be without prejudice to the prudential supervisory powers of the ECB and the NBB, in particular concerning fit and proper requirements. In this respect it is noted that the prudential supervisory powers of the ECB are provided for in the SSM Regulation, which constitutes the legal basis for the supervisory actions the ECB may decide to undertake.

2. Amendment of Belgian law to implement Union legislation on recovery and resolution of central counterparties

2.1 Purpose of the draft law’s provisions amending Belgian law to implement Union legislation on

recovery and resolution of central counterparties

2.1.1 The draft law modifies the Law of 22 February 1998 establishing the organic status of the National Bank of Belgium (hereinafter the ‘Organic Law of the NBB’) in order to implement Regulation (EU) 2021/23 of the European Parliament and of the Council (hereinafter the ‘CCP Recovery and Resolution Regulation’). In particular, the draft law implements the requirement under the CCP Recovery and Resolution Regulation that each Member State must designate one or more resolution authorities for central counterparties , which are empowered to apply the resolution tools and exercise the resolution powers as set out in the CCP Recovery and Resolution Regulation.

2.1.2 The draft law appoints the NBB as resolution authority for the purposes of the CCP Recovery and Resolution Regulation. The NBB is to exercise these functions via the resolution college. This resolution college already exists and exercises resolution powers vis-à-vis other financial intermediaries, such as credit institutions and stockbroking firms. The explanatory memorandum of the draft law specifies that the resolution college is to act as a separate body from the other existing bodies of the NBB, in order to distinguish the NBB’s supervisory tasks from its resolution tasks and to avoid potential conflicts of interest . 2.1.3 The draft law specifies that the operating costs borne by the NBB as resolution authority will be covered by the central counterparties on the basis of modalities determined in a Royal Decree. 2.2 Observations on the designation of the NBB as resolution authority for central counterparties 2.2.1 In accordance with Article 14.4 of the Statute of the European System of Central Banks and of the European Central Bank, the national central banks (NCBs) may perform functions other than those specified in that Statute, unless the Governing Council finds that those functions interfere with the objectives and tasks of the European System of Central Banks (ESCB). Where a Member State assigns such a function to its NCB, that NCB is responsible and liable for the performance of that function. Nevertheless, when defining the responsibility and liability of an NCB in relation to that function, Member States are required to comply with their obligations deriving from Union law and, in particular, Article 123(1) and Article 130 of the TFEU . 2.2.2 Article 123(1) of the TFEU prohibits the NCBs from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Member States. Article 1(1)(b) of Council Regulation No 3603/93 defines the term ‘other type of credit facility’ for the purposes of Article 123 of the TFEU as , amongst others, any financing of the public sector’s obligations vis-à-vis third parties. Accordingly, the NCB concerned must not assume obligations vis-a vis third parties that could potentially be incumbent on the public sector. Consequently, the NCB concerned must not finance pre-existing obligations vis-à-vis third parties that are incumbent on other public authorities or bodies and the effective financing of the obligations vis-à-vis third parties by the NCB concerned must not result directly from the measures adopted by, or from the policy choices made by, other public authorities or bodies . 2.2.3 The ECB notes that while the draft law does not as such impose any financing obligations on the NBB, the designation of the NBB as resolution authority for central counterparties according to the CCP Recovery and Resolution Regulation requires that the conditions under which the NBB is to exercise this function are in line with the above limitations deriving from Article 123(1) of the TFEU. In particular, the liability of the NBB when exercising the function of resolution authority for central counterparties must be limited to infringements of a serious nature of the rules imposed on the NBB in that context . The draft law does not provide for a specific liability regime. In this respect, the

ECB understands that the applicable liability regime is the regime that already exists in relation to the resolution and supervisory tasks of the NBB. That liability regime provides for liability of the NBB only in the cases of gross negligence or fraud and specifies that the existence of gross negligence must be assessed taking into account the specific circumstances of the case at hand, including the urgency faced by the NBB and staff, financial market practices, the complexity of the specific case, threats to savings protection, and the risk of harm to the national economy . These limitations address the requirement that the liability of the NBB when exercising the function of resolution authority for central counterparties be limited to infringements of a serious nature. 2.2.4 Article 130 of the TFEU prohibits Member States from placing their NCBs in a situation which in any way undermines their ability to carry out independently a task falling within the scope of the ESCB . This would be the case if, for example, an NCB were precluded from building up adequate financial resources in the form of reserves or buffers to offset losses, particularly those resulting from monetary policy operations, and the Member State concerned did not ensure in advance that the NCB had the necessary funds to bear the financial burden resulting from exercising a function outside the scope of the ESCB (such as the funds necessary to be able to pay the compensation resulting from the liability regime for that function), while retaining its ability to carry out its ESCB tasks effectively and independently . An NCB constrained in its ability to create and/or restore its reserves or buffers may need to seek the consent of political authorities to obtain funding or recapitalisation. This places the NCB in a situation of dependence on those political authorities of the Member State .The ECB considers that the NBB’s risk of exposure to liability in the context of the exercise of its function as resolution authority for central counterparties is extremely remote due to: (a) the fact that no central counterparty is currently established in Belgium; (b) the exceptional nature of a situation leading to the resolution of a central counterparty; and (c) the limited liability of the NBB in such cases. However, the possibility cannot be entirely excluded that extreme and exceptional situations might arise at some point in the future and result in the exposure of the NBB to such liability. In this respect, a significant amount of the financial risk of the Union financial system is processed by and concentrated in central counterparties on behalf of clearing members and their clients .The possibility cannot be entirely excluded that the NBB’s exercise of its function as a resolution authority of central counterparties might lead to substantial losses and that the magnitude of such losses might constrain the NBB’s ability to build up adequate financial resources to carry out its ESCB tasks. To address such situations, if central counterparties would be established in Belgium, adequate mechanisms should be considered in advance of any future establishment of a central counterparty in Belgium in order to ensure that the NBB is not precluded from building up adequate financial resources in the form of reserves or buffers so as to be able to carry out its ESCB tasks effectively and independently.

3. Amendment of Belgian law to implement Union legislation on a pan-European pension product

3.1 Purpose of the draft law’s provisions amending Belgian law to implement Union legislation on a

pan-European personal pension product

3.1.1 The draft law implements specific provisions of Regulation (EU) 2019/38 of the European Parliament and of the Council (hereinafter the ‘PEPP Regulation’). In accordance with the provisions of the PEPP Regulation , the draft law appoints the FSMA as the competent authority to monitor compliance with the PEPP Regulation in Belgium. The draft law specifies that the FSMA exercises its function with the assent of the NBB, and that this assent relates to compliance with the PEPP Regulation to the extent that it falls within the scope of the NBB’s or ECB's prudential supervisory powers pursuant to the Organic Law of the NBB and the framework of the SSM Regulation, respectively. It appears from the explanatory memorandum that such assent of the NBB is required in two situations. First, if the relevant supplier or distributor of a pan-European pension product (PEPP) is under the supervision of the ECB or the NBB, the FSMA acts only after receiving the assent of the NBB. Second, such prior assent of the NBB before the FSMA acts is also required if the relevant supplier or distributor of a PEPP is under the supervision of the FSMA, but certain conditions that apply are within the competence of the NBB or the ECB. This refers, for example, to the situation where the relevant supplier or distributor under the supervision of the FSMA requires a guarantee from a credit institution. The draft law also specifies that the FSMA must require the assent of the NBB before accepting a registration request from an entity under the supervision of the NBB or the ECB. In that case, the assent relates to the conformity of the registration request with the PEPP Regulation to the extent that it falls within the scope of the NBB’s or the ECB's prudential supervisory powers pursuant to the Organic Law of the NBB and the framework of the SSM Regulation, respectively. 3.1.2 The NBB may also request the FSMA to prohibit an entity from commercialising a PEPP if certain conditions set out in the PEPP Regulation are met (for example, if the distributor has made false declarations) or if there are reasonable grounds to determine that the PEPP presents a risk for the stability of all or part of the financial system. 3.2 Observations on the draft law’s provisions amending Belgian law to implement Union legislation on

a pan-European pension product

3.2.1 The draft law should clarify the reasons for the provisions that the FSMA’s supervision of compliance with the PEPP Regulation is exercised on the basis of assent by the NBB, in particular to the extent that such assent is intended to relate to aspects lying within the ECB’s competence as prudential supervisor. The link between supervising compliance with the PEPP Regulation and the ECB’s supervisory competences in the prudential field does not appear evident and assent should only be required insofar as the prudential supervisor’s tasks are directly affected.

3.2.2 As a general remark in this respect, the ECB notes that the draft law contains certain inconsistencies in that it refers in some places to both the ECB and the NBB, and in other places only to the NBB . This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 27 June 2023. [signed]

The President of the ECB

Christine LAGARDE