de zuniga - Fit and proper rule

The “fit and proper rule” has become a byword in corporate governance as an aftermath of the crises that shook economies in 1997 (Asian Financial Crisis) and in 2008 (Global Financial Crisis).  Many concluded that the crises could have been the result of poor governance, excessive risk taking, conflicts of interest, opacity of transactions and inadequate financial reporting.

All these precipitated in measures to redefine the corporate architecture to instill adherence to high standards of governance with emphasis on integrity, disclosure and transparency.  Regulators around the globe started requiring corporations to adopt their charters of governance, similar to what the Securities and Exchange Commission and the BangkoSentral ng Pilipinas are presently enforcing.

For banks, good governance has been espoused in the General Banking Law by requiring directors and officers to be compliant with the fit and proper rule so as “to maintain the quality of bank management and afford better protection to depositors and the public in general”.  Under good corporate governance, bank directors and officers are expected to be the best examples of competence and integrity as corporate decision  makers.

By selecting only those fit and proper to serve as directors and officers, the public will be assured of the quality of management in the bank.  The fit and proper rule will ensure that bank directors and officers will always be conscious of the need to take prudent decisions, bearing in mind that banking is based on trust and confidence (Banking Laws of the Philippines, Book II, p. 122).

The fit and proper rule is an implementation of Principle 3 of the Core Principles for Effective Banking Supervision issued by the Bank for International Settlements, the bank of central banks.The principle stresses the need for the licensing authority to set criteria for licensing of banks and reject applications that do not meet the required standards.  The process of licensing should, at the minimum, consist of an assessment of the directors and senior management of the bank (ibid.).

The fit and proper rule has been implemented through BSP regulations such as those prescribing the qualifications and responsibilities of directors and officers, requiring the confirmation of their election/appointment by the BSP, requiring attendance in seminars on good governance, and requiring the election of independent directors.  In addition, the creation of governance committees has become mandatory together with the requirement to adopt charters for related party transactions or RPTs.

Non-compliance with the fit and proper standards could mean the removal and disqualification of a director or officer.  Acts or omissions committed by a director or officer which constitute violations of law and regulations, which are also deemed as deviations from good governance, would also render him unfit and thereby subject him also to removal and disqualification, notwithstanding the fact that the BSP confirmed his election/appointment before. In other words, the review of the fitness of a director occurs not only upon his election, but is a continuing one in the course of his incumbency.All these would reflect the extent that the fit and proper rule is being enforced by the regulators.  Such enforcement is indeed only a part of the equation.  The more important part would be for all the stakeholders of a corporation to embrace and adopt willingly the fit and proper rule for their own advantage and benefit.

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The above comments are the personal views of the writer. His email address is dezunigajuan@gmail.com

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