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Technical Advice Summary on Review of Article 16 of Directive 2000/12/EC

Background

• In January 2005, the European Commission requested technical advice from CEBS on reviewing Article 16 of the Consolidated Banking Directive (CBD).
• The review was prompted by concerns about the lower incidence of cross-border mergers and acquisitions (M&A) in the EU financial sector compared to other sectors.
• CEBS designed a roadmap involving the Consultative Panel and an open questionnaire to gather input.

Areas of Technical Advice

CEBS was asked to provide advice on the following four areas:

1. Explicit criteria for assessing the suitability of qualifying shareholders
2. Mutual recognition agreements
3. Review of notification thresholds
4. Transparency provisions for negative decisions

CEBS focused on the first three areas, excluding the redress mechanism.

General Views

• Article 16 is a key prudential tool that has been effective in ensuring financial stability.
• The Commission is interested in ensuring that Article 16 is not used for non-prudential reasons, such as protecting national control.
• The industry generally supports the prudential role of Article 16 and recognizes the need for discretion in its implementation.
• Suitability criteria are seen as a potential barrier to M&A due to the lack of a common interpretation across Member States.
• Mutual recognition is complex due to differences in legal systems and national supervisory competencies.
• Transparency is important, but public notification of negative decisions is not recommended due to potential reputational and legal risks.

I. Explicit Criteria for Assessing the Suitability of Qualifying Shareholders

Key Points

• Suitability should be assessed through a two-step procedure:

  1. General suitability (fitness and properness of the shareholder)
  2. Refined suitability (appropriateness of the shareholder in relation to the target institution)

• CEBS supports the inclusion of indicative criteria in the Directive to guide competent authorities, but emphasizes that these should be non-exhaustive due to national legal differences.

Proposed Criteria

• Qualifying shareholders must be fit and proper, with no criminal records related to commercial activity.

• They must have appropriate financial strength relative to the target institution.

• A sound business plan and strategy for the target institution should be in place.

• Corporate governance arrangements must be adequate and appropriate.

• New managers must be fit and proper, as defined in Article 6 of the CBD.

• The resulting group structure must be transparent for effective supervision.

• Conflict of interest management arrangements should be appropriate and adequate.

• CEBS acknowledges that additional criteria such as financial support and commitment to stay in business could be considered, but believes these are better addressed through supervisory convergence at level 3.

II. Mutual Recognition Agreements

Key Points

• Mutual recognition of suitability assessments is possible for negative decisions.
• For positive assessments, mutual recognition is complex and may not be feasible due to legal and supervisory differences.
• CEBS proposes that negative assessments should be recognized across Member States to facilitate smoother M&A processes.
• A positive assessment under Article 7 should be considered as an important factor in the first step of suitability assessment under Article 16.

III. Review of Notification Thresholds

Key Points

• CEBS believes that changing the notification thresholds is not necessary.
• The current thresholds are appropriate and do not impose an undue burden on the industry.
• National thresholds vary, and this diversity provides prudential flexibility.
• Reasonable thresholds depend on national company law and ownership structures.

IV. Transparency of Negative Decisions

Key Points

• CEBS recommends clarifying that transparency requirements under Article 10 should also apply to refusals under Article 16.
• Public notification of negative decisions is not advised due to the risk of misunderstanding and reputational damage.
• Transparency measures could include:
  • Publishing the methodology used for suitability assessments
  • Yearly aggregate disclosure of negative decisions (without breaching confidentiality)
  • Sharing of information between competent authorities

Conclusion

CEBS emphasizes that Article 16 should remain a prudential tool and not be altered solely to facilitate M&A. It supports the introduction of indicative criteria for suitability, the mutual recognition of negative assessments, and the enhancement of transparency through specific measures. However, it cautions against harmonizing suitability tests across the EU due to legal and supervisory diversity.