When you dress a lizard in a suit you will have trouble with his tail!

A seminar on Financial Institutions and their Supervisor was held in Aruba on Wednesday April 20, 2016.

 

The seminar was organized by the Aruba Bankers’ Association & Insurance Association of Aruba. I was one of the keynote speakers and delivered my presentation in the English language (click here for the presentation).

 

I have addressed several issues. Here follow a few quotes:

 

What makes financial institutions like banks and insurance companies special is that the scope of duties of managing and supervisory directors – i.e. the scope of corporate governance – goes beyond that of non-financial businesses, to include not only account holders, debt holders, insurance policy holders and other creditors who have put their trust – and money – in them, but also the financial system as a whole and thus the reputation of Aruba as a member of the global community. Public trust and confidence are the very essence of financial institutions like banks and insurance companies.

 

According to the Guidance Notes for the Supervisory Board of Supervised Financial Institutions, issued by the Central Bank of Curaçao and Sint Maarten in 2001: “An institution’s Supervisory Board is ultimately responsible for the conduct of the institution’s affairs. The Supervisory Board controls the institution’s direction and, hence, its overall policy. In doing this, the Supervisory Board determines how the institution will conduct its business in the long term”…

 

I beg to differ! When you dress a lizard in a suit you’ll have trouble with his tail! (Dito Arends) One size doesn’t fit all. Legislation and regulations should be designed to fit the particular role supervisory directors play. (…)

 

So this means that the regulatory legislation and the guidelines of the Central Bank not only affect the nature and extent of the duties of directors and supervisory directors but because of this also the question of cases in which they can be held personally liable. After all, in answering the question of whether they performed their duties properly the question will also be considered of whether they violated standards laid down in the regulatory legislation or in guidelines of the Central Bank based on it.

 

Therefore it is important, particularly in the guidelines issued by the Central Bank, that the specific duties of the management board as well as the specific duties of the supervisory board are taken into account as they are laid down in the Commercial Code. Supervisors such as the Central Bank tend to impose obligations on the supervisory directors in particular which differ from the legal system and thereby create a much heavier responsibility on the supervisory directors than is desirable. Of course, it is the case that the responsibility is something other than liability, but unnecessary disquiet and confusion is created because the nature and extent of the duties of the supervisory directors aren’t properly born in mind. Supervisory directors aren’t the highest power in a company and neither are they the ones who ultimately determine the policy or direction of the business: but they do review the policy or proposals for that policy or their implementation. So supervisory directors aren’t 100% responsible for the policy and neither are they the ones who are ultimately responsible. The key actors in financial institutions are the managing directors.

 

Supervisory directors are a type of baywatchers. They should obviously have certain qualities, but their primary duty is to exercise supervision. The swimmers and surfers (the managing directors) themselves determine what they do and how they do it and in what direction they swim or surf. The baywatchers can – and if it involves supervisory directors in relation to directors: they must – join in the conversation, become informed, ask questions and advise, but in the end the swimmers and surfers themselves decide what they do. They should do this responsibly though. If they take too big risks or they put themselves in danger, or they cause a dangerous situation for others, or if there is even a threat that everything goes wrong, and someone might drown, the baywatchers have to intervene. That is (also) their duty.

 

Ongoing regulatory actions in many countries continue to increase the duties and responsibilities of supervisory directors. In the regulatory legislation and in particular in the guidelines of the Central Bank the supervisory directors’ own position and duties must be taken into account. This doesn’t always happen to a sufficient extent. This also applies to the guidelines of the Basel Committee, which guidelines have influenced banking laws and regulations in many jurisdictions. And it isn’t for nothing that in response to the criticism of the 2010 guidelines it was decided to suggest adjustments, for instance to replace the word “ensure” in several cases by the word “oversee”, which is of course closer to “supervise”. We should also keep in mind that certain guidelines may be beneficial in some countries but may be less beneficial in other countries. The Basel Committee itself stated that there are significant differences in the legislative and regulatory frameworks across countries and that each jurisdiction should apply the provisions as the national authorities see fit.

 

Karel Frielink

(Attorney/Lawyer, Partner)

 

(21 April 2016)

 

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