Fit and proper standards of public interest entity (PIE) directors in Malta

Abstract

Good governance is essential for the long-term survival and success of an institution and highly depends on the effectiveness of the Board of Directors. Over the past few decades, several corporate scandals and resulting collapses have been attributed to weak corporate governance, faced at Board level. Financial services regulators prescribed the “fit-and-proper” regime as a cornerstone of prudential regulation. Directors are required to be fit-and-proper at all times to ensure sound and prudent management. Whilst the onus is on institutions to conduct due-diligence of Board members, the regime enables regulators to conduct independent assessments of director suitability. Accordingly, supervisors may prevent persons who are not fit-and proper from entering the financial system or from continuing their role. This control mechanism is a means of raising public confidence in the integrity of the financial services system and is a key element of an effective supervisory system. However, in the European Union fit-and-proper requirements are one of the least harmonised areas and deep cross-country differences affect both the assessment process and criteria evaluated. This dissertation analyses the relevant fit-and-proper standards of directors of credit institutions, insurance undertakings and listed entities. In view of the significant relevance of these companies on society at large and their potential impact on public interest, it is argued that directors are expected to possess and maintain the highest standards. Given that fit-and-proper requirements are a key pillar of any corporate governance framework, this dissertation evaluates the manner in which directors are regulated and supervised. It notes that the financial supervision mechanism in the European Union includes the fit-and-proper regime in their regulatory frameworks, whilst listed entities operating in sectors other than financial services are governed through national codes of principles. Even though there is an apparent regulatory gap between the regulation of directors in the financial sector and other sectors, it is argued that this is bridged by soft law.