This content is from: Local Insights

The tone at the top

The financial crisis has prompted legislators and supervisory authorities to reconsider their priorities and objectives. In the Netherlands, this has lead to a renewed focus on corporate governance of financial institutions

Hans Sachse Philip Reeser Cuperus

The financial crisis has prompted legislators and supervisory authorities to reconsider their priorities and objectives. In the Netherlands, this has lead to a renewed focus on corporate governance of financial institutions. Financial institutions are confronted with supervisory authorities taking a more active and intrusive approach in their supervision of corporate governance.

In several recent publications, the Dutch financial markets supervisors (the Dutch Central Bank, or DNB, and the Authority for the Financial Markets, or AFM) have indicated a broadening in focus from compliance with formal requirements towards an approach aimed at more informal, cultural elements of a financial institution's governance. This new focus for instance concerns remuneration policies, but also the tone at the top with respect to compliance.

A lack of focus by financial institutions on the interests of their clients is regarded as one of the main causes of the financial crisis. The supervisory authorities therefore now propagate that remuneration policies should be aimed at providing incentives to put the clients' interests first.

According to the supervisory authorities, putting the clients' interests first should be part of the culture of a financial institution. This culture is deemed to partly stem from the tone at the top, or the behaviour of the individuals leading the institution. Whereas there are no statutory obligations prescribing any certain tone, it can be argued that the behaviour of those in charge reflects on their suitability as well as on the effectiveness of the internal control procedures that have to be in place. An inappropriate tone at the top may incite informal measures from the supervisory authorities, such as a warning letter or a stern talking-to, but could also lead to formal measures such as an order to replace one or more directors, a fine or even – ultimately – revoking a licence.

When preparing for, and dealing with, this intensified attention from the supervisory authorities, financial institutions could benefit from looking in turn into the governance of the supervisory authorities. The supervisory authorities own governance has also been scrutinised subsequent to the financial crisis. This has led to certain changes to the checks and balances that were already in place. The Act Strengthening Governance of DNB and AFM (Wet versterking governance van de Nederlandsche Bank en de Autoriteit Financiële Markten) came into force on February 16 2012. This Act, among other things, increases the responsibilities of the supervisory boards of the DNB and AFM and limits the number of re-appointments within their management boards. The procedure for appointment of new board members is also subject to new rules aimed at appointment of suitable persons. This new Act has furthermore introduced powers for the Minister of Finance to adopt policy rules for the DNB and AFM with respect to their internal organisation and their cooperation with other supervisory authorities. In short, the supervisors of the supervisors have gained in influence and importance and are at the same time subject to more stringent regulation concerning their own appointment.

It may be helpful for financial institutions to keep these developments within the corporate governance of the financial markets supervisors in mind, when reviewing the checks and balances within their own corporate governance architecture. It will certainly be conducive to talks with the regulators, if the corporate governance of the financial institution contains checks and balances equal or comparable to those of the supervisors.

Hans Sachse and Philip Reeser Cuperus

Instant access to all of our content. Membership Options | One Week Trial