Opinion of the European Central Bank of 20 July 2023 on certain aspects relating to the assessments of the acquisition of qualifying holdings in credit institutions and fit and proper assessments in relation to appointees in credit institutions (CON/2023/22)
OPINION OF THE EUROPEAN CENTRAL BANK of 20 July 2023 on certain aspects relating to the assessments of the acquisition of qualifying holdings in credit institutions and fit and proper assessments in relation to appointees in credit institutions (CON/2023/22) Introduction and legal basis
On 6 June 2023 the European Central Bank (ECB) received a request from Българска народна банка (Bulgarian National Bank (BNB)), acting on behalf of the Bulgarian Council of Ministers, for an opinion on a draft law amending the Law on credit institutions and the Law on payment services and payment systems (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, Article 25.1 of the Statute of the European System of Central Banks and of the European Central Bank and the sixth indent of Article 2(1) of Council Decision 98/415/EC as the draft law relates to (1) the implementation of Union legislation relating to the prudential supervision of credit institutions and to the stability of the financial system, (2) the ECB’s tasks concerning the prudential supervision of credit institutions under Article 127(6) of the Treaty, and (3) rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. 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. Purpose of the draft law
1.1 As explained in the consultation letter accompanying the draft law, the draft law aims to address certain recommendations made in a report by the Committee of Experts for the Evaluation of Anti- Money Laundering Measures of the Council of Europe (MONEYVAL). 1.2 The draft law proposes to establish the concept of a close associate of an applicant for (1) authorisation of a credit institution, (2) acquisition of a qualifying holding in a credit institution and (3) appointment as a member of the management bodies of a credit institution, a key function holder or another appointment that requires supervisory approval in accordance with the Law on credit institutions. The draft law defines such close associates as comprising (1) any natural person who holds a managerial position at a legal person where the applicant holds a managerial position or is
its beneficial owner; (2) any natural person who is the beneficial owner of a legal person where the applicant holds a managerial position; (3) any natural person who is the beneficial owner of a legal person jointly with the applicant; (4) any person linked to the applicant who has been convicted of an intentional criminal offence, unless such person has been rehabilitated, and with whom the applicant or the appointee, as the case may be, maintains financial and/or non-financial links. 1.3 The draft law further provides that an appointee who has a close associate who has been convicted of an intentional criminal offence subject to public prosecution, unless such close associate has been rehabilitated, will not be eligible for appointment. Moreover, the draft law provides that the supervisor must ensure, based on information collected about an appointee, as well as about their close associates and the links between them, that there are no grounds to doubt the appointee’s reliability and suitability or to suspect potential conflicts of interest.
2. General observations
The draft law introduces detailed provisions on specific aspects of the supervisory assessments to be carried out in relation to the authorisation of a credit institution, the acquisition of a qualifying holding in a credit institution and the appointment of members of management bodies and key function holders in credit institutions. The ECB recognises the importance of Bulgaria ensuring a strong anti-money laundering and countering the financing of terrorism framework, as money laundering and terrorism financing risks pose a danger to the sustainability of banks, and can seriously damage trust in the banking sector and therefore negatively impact financial stability . The agreement on participation of the Bulgarian lev in the exchange rate mechanism (ERM II) is accompanied by a firm commitment by the Bulgarian authorities to pursue sound economic policies with the aim of preserving economic and financial stability and achieving a high degree of sustainable economic convergence. The Bulgarian authorities have committed to implement specific policy measures in relation to the non-banking financial sector, state-owned enterprises, the insolvency framework, and the anti-money laundering framework . From this perspective, the provisions introducing the possibility to consider the impact of close associates on the applicants’ reputation may help to increase the consistency, and thus clarity, of assessments regarding reputational aspects. However, the ECB highlights a number of specific considerations and possible issues relating to the application of the draft law in specific cases.
3. Specific observations
3.1 Close associates for the purposes of the assessment of an authorisation or the acquisition of a
qualifying holding in credit institutions
As regards qualifying holding procedures, the draft law proposes to introduce the concept of ‘close associates’. The ECB understands that in this context the draft law aims to further specify the concept of a ‘person linked to the proposed acquirer’ referred to in the Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector
(JC/GL/2016/01) , which can be taken into consideration by the supervisor when assessing the integrity of the proposed acquirer. This legal anchor may be helpful when assessing the integrity of a person intending to acquire a qualifying holding in a Bulgarian credit institution. At the same time, the draft law does not specify the interface between the proposed definition of close associates and the assessment of the authorisation or the proposed acquisition of a qualifying holding in a credit institution. The ECB understands that this interface will be further specified in the respective BNB ordinances regulating in detail the assessment of an application for authorisation or a proposed acquisition of a qualifying holding. The criteria for assessment of the application for authorisation or the proposed acquisition of a qualifying holding are specified in Directive 2013/36/EU of the European Parliament and of the Council , as implemented in Bulgarian law. The ECB understands that the draft law does not seek to constrain the ECB’s discretion as the responsible authority for the assessment of the authorisation or the acquisition of qualifying holdings in all credit institutions within the Single Supervisory Mechanism (SSM). In this regard the ECB understands that the indications relating to a close associate are one of the considerations to be taken into account in respect of the assessment of the reputation of the applicant or the proposed acquirer. It may be useful for the draft law to specify that assessment of close associates of the applicant or the proposed acquirer forms part of the case-by-case assessment of reputation taking into account all relevant aspects of the matter at hand. 3.2 Close associates for the purposes of the assessment of suitability of members of the management bodies and key function holders in credit institutions and other individuals who require supervisory
approval in accordance with the Law on credit institutions
The ECB acknowledges and welcomes the intention of strengthening the suitability assessment of members of the management bodies and key function holders in credit institutions and other individuals who require supervisory approval in accordance with the Law on credit institutions. This assessment includes consideration of relevant criminal convictions. Against this background, the ECB offers the following reflections, aimed at supporting BNB’s endeavours to further strengthen the Bulgarian banking sector by enhancing anti-money laundering measures. These reflections specifically concern (1) the legal basis, (2) the principle of proportionality, (3) data protection and (4) practical implementation. 3.2.1 Legal basis The draft law seemingly takes a different approach to the assessment of the reputation of an appointee than that taken in Directive 2013/36/EU, the Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders
safeguards. The ECB recommends that the consulting authority should enhance the draft law by providing clear and precise rules governing the extension of the interference with the data subjects’ right to data protection, as well as provisions reaffirming some key principles of data protection (e.g. purpose limitation, data minimisation, storage limitation), in order to ensure that such interference is limited to what is strictly necessary and that the data subjects have sufficient guarantees to effectively protect their personal data. 3.2.4 Practical implementation The ECB understands that currently BNB is granted automatic access to criminal records for Bulgarian citizens only, and not for persons who are not Bulgarian citizens. Consideration needs to be given on how this information for non-citizens would be obtained in practice and whether additional formal mechanisms for cooperation should be established with foreign counterparts. This may have an impact on the level playing field in the assessment of appointees if close associates who are not Bulgarian citizens need to be assessed.
This opinion will be published on EUR-Lex.
Done at Frankfurt am Main, 20 July 2023.
[signed]
The President of the ECB
Christine LAGARDE
Fotnoter
- 1 Law on credit institutions (Закон за кредитните институции, обн. ДВ, бр. 59 от 21.07.2006 г.). 2 Law on payment services and payment systems (Закон за платежните услуги и платежните системи, обн. ДВ, бр. 20 от 06.03.2018 г.). 3 Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42).
- 4 See also paragraph 1.2 of Opinion CON/2018/55, paragraph 2.3 of Opinion CON/2019/22 paragraphs 1.2 to 1.4 of Opinion CON/2022/5 and paragraphs 1.2 and 1.3 of Opinion CON/2022/4. All ECB opinions are available on EUR- Lex. 5 See press release, Communiqué on Bulgaria, 10 July 2020, available on the ECB’s website at www.ecb.europa.eu.
- 6 See Section 10.21 of the Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (JC/GL/2016/01), available on the website of the European Banking Authority at www.eba.europa.eu. 7 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).
- 8 9 (EBA/GL/2017/12) and the ECB’s Guide to fit and proper assessments . Specifically, these documents provide that the conclusions drawn on an appointee’s reputation should be based on that appointee’s own conduct and reputation and do not envisage an appointee’s fitness and propriety being derived from another legal or natural person’s fitness and propriety. As such, the draft law may be perceived as going beyond the objective of Directive 2013/36/EU and overstretching the interpretation of the Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders, and in particular paragraph 78(e) thereof, which provides that a member of the management body should uphold high standards of integrity and honesty, and that, inter alia, any evidence that suggests that the person acts in a manner that is not in line with high standards of conduct is among the factors that should also be considered in the assessment of reputation, honesty and integrity. Moreover, the introduction of legal provisions under which the fitness and propriety of another natural person automatically impacts on the fitness and propriety of an appointee (even if the appointee were able to sever the link in some cases), would have an impact on the level playing field across the SSM and the efforts made to create a Single Rulebook to provide a single set of prudential harmonised rules that institutions throughout the Union must respect. 3.2.2 Principle of proportionality The draft law introduces the rule that an appointee is automatically deemed unsuitable if a close associate is criminally convicted . This automaticity raises questions about compliance with the principle of proportionality. The ECB suggests that the consulting authority should reconsider the introduction of this automatic consequence, also given that the draft law provides the competent authority with the possibility to assess the impact of such close associates on the suitability of the appointee on a case-by-case basis . Specifically, in line with the approach taken for relatives, the ECB would welcome the draft law clarifying that the assessment of close associates of the appointee is part of the case-by-case assessment of the reputation of the appointee taking into account all relevant aspects of the case, thereby underscoring the ECB’s supervisory discretion in fit and proper assessments and forsaking the automaticity through which an appointee becomes unsuitable. 3.2.3 Data protection The definition of close associate encompasses a number of third parties. An assessment of the relevant facts in relation to such close associates, whether conducted by an appointee, the supervised entity or the prudential supervisor, would require access to the criminal records of third parties. Such access currently falls outside the scope of fit and proper assessments. Obtaining the criminal records of persons other than the appointee raises not only practical concerns but also data protection concerns. Due to the potentially high degree of intrusiveness involved, consideration needs to be given to counterbalancing these concerns by ensuring additional
- 8 Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders (EBA/GL/2017/12). 9 See ECB Banking Supervision, Guide to fit and proper assessments, available on the ECB’s Banking Supervision website at www.bankingsupervision.europa.eu. 10 See proposed revised Article 11(1)(3a) of the Law on credit institutions. 11 See proposed revised Article 11(1)(9) of the Law on credit institutions.