DNB is tightening its stance on the need to have a Supervisory Board (SB) in place at the level of the supervised institution. DNB has power to grant (partial) dispensation from this requirement – a permission to operate without an SB or similar organ, or to have an SB of less than three members, either temporarily or permanently (Section 3:19(3) of the Wft). To qualify for dispensation, the undertaking has to demonstrate a) that it cannot reasonably be required to have a three-strong SB and b) that the objective which the requirement seeks to attain can be attained otherwise. In principle, DNB will no longer grant requests for dispensation.
In DNB’s opinion, every company should have an internal organ that exercises critical and independent supervision of the policy pursued by the Management Board and the general course of events within the organisation. DNB regards this as essential in the interest of the corporation and its connected enterprise.
DNB will therefore review all standing cases of indefinite dispensation from the requirement for authorised entities to have an SB in place. Thus DNB intends to give the fullest possible implementation to Section 3:19 of the Wft, which requires an authorised financial institution to have an internal supervisory organ in place that protects the institution’s interests.
What are the requirements for an SB under the Wft?
The Wft imposes an obligation to have in place a Supervisory Board (Raad van Commissarissen) or another organ with a similar mandate, consisting of at least three persons, on:
- A clearing institution or bank established in the Netherlands which is a public or private limited company, or an insurer established in the Netherlands which is a public limited company or a European company (Section 3:19(1)), and for
- A clearing institution or credit institution established in the Netherlands which is neither a public limited company nor a private limited company (Section 3:19(2)).
The aim which these provisions aim to achieve is formulated in Section 2:140 and 2:250 of the Dutch Civil Code: ‘It is the duty of the SB to exercise supervision over the policy pursued by the Management Board and over the general course of developments in the corporation and its connected enterprise.’ The SB advises the Management Board. In performing their duties, the Supervisory Board members should serve the interest of the company and its connected enterprise.
How does DNB handle standing cases of indefinite dispensation?
One important lesson from the financial crisis is that internal supervision is of high importance for an enterprise and in many cases requires strengthening. Monitoring the presence of an SB helps towards realising this aim. In the past (before the Wft entered into force in 2007), many insurance subsidiaries used to be granted dispensation. The Wft requires life, nonlife and health care insurance business to be legally separated from each other, in view of the different interests that each protects. This mandatory separation is in many cases bypassed where operational governance is concerned: internal supervision of subsidiaries operating under dispensation from the SB requirement is often exercised by a single central Supervisory Board at the parent level. More generally, it is important that internal supervision should be organised in the form of a Supervisory Board at the level of the authorised entity, whether or not it is a class-specific insurer, clearing institution or bank.
DNB will enter into dialogue with firms about the quality and structure of their governance. Firms that operate under a level of dispensation that would no longer be granted today, will be asked to improve their governance. The importance of internal supervision justifies DNB’s intensified surveillance.