Official Information of 5 August 2020

Official Information of the Czech National Bank of 5 August 2020 on the interpretation of the concepts of reliability and professional competence

I. Scope and Purpose

1. By this Official Information, the Czech National Bank provides an interpretation of the concepts of reliability and professional competence for the purposes of their initial and ongoing assessment of: a) natural persons acting for financial service providers subject to the supervision of the Czech National Bank under Act No. 6/1993 Coll., on the Czech National Bank, as amended (hereinafter referred to as "financial service provider"), b) persons with qualified holdings in financial service providers, c) financial holding companies, insurance holding companies, and mixed financial holding companies.

2. The concepts of reliability and professional competence are in most financial market legislation so-called indefinite legal concepts. The Czech National Bank therefore informs about its approach to assessing the reliability and professional competence of persons, which is based inter alia on the general guidelines of European supervisory authorities (e.g., General Guidelines on Governance Systems, EIOPA, 2013, Joint Guidelines on the prudent assessment of acquisitions or increases of qualified holdings in the financial sector, EBA, EIOPA and ESMA, 2016 or General Guidelines on the assessment of the suitability of members of the management body and key function holders, EBA and ESMA, 2018).

3. The rules concerning reliability set out in this Official Information will be fully applied to members of the statutory and supervisory (control) bodies, members of the board of directors or other similar bodies (hereinafter referred to as "members of the management body"), persons in senior management, persons in management of key functions, persons with qualified holdings in a financial service provider, persons in management of a branch, financial holding companies, insurance holding companies and mixed financial holding companies, and employees who directly participate in or are responsible for the distribution of selected products on the financial market. With regard to other persons through whom a financial service provider ensures its activity (e.g., employees providing business loans, employees involved in the area of risk management or internal control other than persons in management of key functions, employees active in information technology), the Official Information on reliability is applied appropriately and specifically to the performance of their activity. The specific conditions of their reliability are set by the financial service provider.

4. The rules concerning professional competence set out in this Official Information apply to members of the management body, heads of branches, persons in senior management, persons in management of key functions, persons in management of financial holding companies, insurance holding companies and mixed financial holding companies. For employees who directly participate in or are responsible for the distribution of selected products on the financial market, individual sectoral laws requiring proof of general knowledge and professional knowledge and skills apply. For other persons through whom a financial service provider ensures its activity, the financial service provider sets the specific conditions of their professional competence. The rules established by the Official Information in the area of professional competence represent only minimum requirements for knowledge, professional practice and managerial practice. When assessing the adequacy of professional competence, it is therefore necessary to always take into account the specific function performed and the scope of competences, the nature, scope and complexity of the activity of the financial service provider and the collective competence of the body concerned as a whole. The procedure for assessing the professional competence of persons at selected financial service providers is regulated in more detail in the aforementioned general guidelines issued by EBA, ESMA and EIOPA.

5. The Official Information cannot be used if any legal regulation governing business on the financial market contained a different definition of the concepts of reliability and professional competence, which would be contrary to this Official Information.

6. The statement of the Czech National Bank as a supervisory authority over the financial market on the interpretation of the concepts of reliability and professional competence is set out in the Annex to this Official Information. However, the Czech National Bank does not exclude that in justified cases it will also take into account facts not mentioned in this Official Information. The Czech National Bank expects that financial service providers will follow this Official Information in their own assessment of the reliability and professional competence of relevant persons.

II. Final Provisions

1. This Official Information reflects the legal status as of 1 August 2020. Due to possible changes in legal regulation, it is necessary to take into account the current legal status when applying this Official Information.

2. This Official Information enters into force on the day of its publication in the Bulletin of the Czech National Bank. On the day this Official Information enters into force, the Official Information of the Czech National Bank No. 14/2013 Bull. ČNB of 3 December 2013 on the interpretation of the concepts of reliability and professional competence ceases to be valid.

Deputy Governor: Ing. Marek Mora, M.E. s. p.

Annex: Statement on the interpretation of the concepts of reliability and professional competence Section for Regulation and International Cooperation

Annex Statement on the interpretation of the concepts of reliability and professional competence

I. Reliability

1. General Rules

Legal regulations generally require that persons acting for financial service providers be reliable. The concept of reliability corresponds to the concept of "good repute", which some legal regulations used in connection with the approval of persons in the years 2001 to 2004. The content of these concepts is essentially identical, as both are based on the same provisions of the relevant directives ("good repute", "gut beleumdet", "honorabilité"). In some regulations, this concept is defined as a "prerequisite for the proper conduct of activity under this law", but even this definition does not provide detailed guidance and its application should be based on the content of the concept of reliability described below. Reliability is generally a criterion taking into account:

• compliance with legal and ethical rules,
• moral profile and integrity. Reliability of a person for the purposes of assessment on the financial market consists mainly of their integrity and their professional and business integrity. Integrity is part of reliability. When assessing the condition of reliability, it is taken into account how a person acting for a financial service provider has manifested themselves during their previous professional or business activity, in particular whether they have previously been convicted of an intentional crime, whether a final sanction or administrative penalty (hereinafter referred to as "sanction") for an offence or other administrative offence (hereinafter referred to as "offence") or an obligation to compensate for damage has been imposed on them in connection with the exercise of a profession, employment, function or business activity (hereinafter referred to as "profession"), whether they have always fulfilled their obligations to the supervisory authority or state control in the performance of their function and whether they have observed the principles of fair business conduct and have not disrupted competition. When assessing reliability, the following are taken into account:
• information and documents submitted by the person being assessed,
• publicly available sources (e.g. published decisions on imposed sanctions),
• own findings (e.g. information obtained during supervision, own investigation by the financial service provider),
• possibly other facts that are available in the given case in connection with the activities performed by the person being assessed. In proceedings in which the Czech National Bank assesses the reliability of a person, it relies on the principle of absence of negative news. This does not affect the obligation of the applicant or the person being assessed to submit all documents required by legal regulations or requested by the Czech National Bank itself. It is primarily the responsibility of the applicant or the person being assessed to submit all documents that enable the Czech National Bank to assess the fulfillment of statutory conditions. If the documents submitted by the applicant or the person being assessed do not allow the Czech National Bank to conclude that the conditions have been met by the person being assessed, the Czech National Bank will reject the application or withdraw consent to perform the activity.

The Czech National Bank assumes that the financial service provider will set up internal procedures that will lead its employees to report facts related to their reliability. The financial service provider relies on information that it is able to obtain with reasonable effort. A suitable verification standard is

• obtaining an extract from the criminal register at the beginning of the employment of an employee, as well as requesting other information related to reliability (inspired by forms from the licensing regulations of the Czech National Bank adapted to the responsibility of the employees being assessed) in the form of a statement of honor,
• obliging the employee of the financial service provider to report changes in such obtained information and further to confirm the accuracy of the information at reasonable intervals (usually every year, not longer than two years) in the form of a statement of honor.

2. Specific Conditions

2.1. Lack of Reliability

The Czech National Bank does not consider a person acting for a financial service provider to be reliable, in particular a person: a) who has previously been finally convicted of an intentional crime, or of a crime against property or an economic crime committed through negligence (unless they are to be regarded as not having been convicted), b) who has been finally fined for an offence or ordered to cease activity or ordered to compensate for damage in the last 5 years for a serious or repeated violation of a legal obligation in connection with the exercise of a profession, c) who has intentionally submitted a false or incomplete witness statement in an offence or other administrative proceeding or has provided false information in a statement of honor to an administrative authority or otherwise disrupted supervision in the field of the financial market and final decisions have been made on these violations, d) who has seriously violated the principles of fair business conduct or disrupted competition, abused confidential information, including personal data of other persons, violated commercial or banking secrecy, or another obligation of confidentiality in the last 5 years and final decisions have been made on these violations, or e) regarding whose assets a decision on insolvency has been issued in the last 5 years, if it was not connected with permission for debt relief, f) who was a member of the management body of a legal entity in the last 5 years,

• regarding whose assets a decision on insolvency was issued or bankruptcy was declared,
• if the insolvency petition for the assets of such a legal entity was rejected because the assets of such a legal entity were insufficient to cover the costs of the insolvency proceedings, or
• if the bankruptcy on their assets was canceled because the assets of the legal entity were completely insufficient, g) who had their authorization to conduct activity revoked in the last 5 years for violation of conditions established by the law governing business on the financial market, or h) who was previously a member of the management body of a legal entity that was finally convicted of an intentional crime, or of a crime against property or an economic crime committed through negligence (unless they are to be regarded as not having been convicted). Points e) and f) shall not apply if the insolvency court canceled the bankruptcy otherwise than by a resolution on the cancellation of bankruptcy after the fulfillment of the distribution resolution or otherwise than because the debtor's assets were completely insufficient, or if the court rejected the insolvency petition otherwise than because their assets were insufficient to cover the costs of the insolvency proceedings. Point f) shall not apply if the person was appointed to the function already during the insolvency of the legal entity, or if the person can obtain in proceedings under the law governing special court proceedings a determination that they performed their previous function with the care of a good manager. Point h) shall not apply if the person was appointed to the function of the legal entity only after the crime was committed, or did not demonstrably participate in it (e.g. voted against measures in the body concerned leading to the commission of the crime) and tried to avert its consequences (e.g. by actions minimizing its impact) or contributed to its investigation (e.g. by filing a criminal report). The 5-year time test mentioned in point b) to g) is extended to 10 years in the case of members of the management body of banks, savings and loan cooperatives, insurance companies and pension companies with regard to the systemic importance of these financial service providers for the financial stability of the Czech Republic. The beginning of the further time test for serious doubts about reliability is shifted accordingly in this case.

2.2. Serious Doubts about Reliability

The Czech National Bank finds serious doubts about the reliability of a person acting for a financial service provider, in particular in the case of a person: a) who was previously finally convicted of a crime committed through negligence in connection with the exercise of a profession (unless they are to be regarded as not having been convicted) and it is not a crime mentioned in point 2.1.a), b) in whom one of the facts mentioned in point 2.1.b), d) to g) occurred earlier than in the last 5 years, c) who submitted a false or incomplete witness statement in an offence or other administrative proceeding or provided false information in a statement of honor to an administrative authority or otherwise disrupted supervision or control in the field of the financial market, in cases not mentioned in point 2.1.c), d) regarding whose assets a decision on insolvency was issued in the last 5 years, if it was connected with permission for debt relief, e) whose consent to election, appointment, or establishment to a function, or to acquisition or increase of a qualified holding or control was finally refused by a court or administrative authority, or such consent was finally withdrawn, if such consent was required for such election, appointment or establishment to a function, or to acquisition or increase of a qualified holding or control, and it was related to the assessment of their reliability, f) whose permit to conduct business activity was finally suspended or revoked for reasons other than at their request, or who themselves requested the suspension or revocation of the permit to conduct business activity during such proceedings initiated ex officio, g) whose application for membership (participation) in a regulated market organizer, professional association, chamber or association of financial service providers, including foreign ones, was rejected for reasons related to reliability, or who violated legal obligations for which a disciplinary penalty was imposed by such a community, or who were excluded from such a community or whose membership (participation) was suspended, h) who was a member of the management body, a person authorized to act on behalf of a legal entity based on another fact, or who substantially influenced the behavior of a legal entity or significantly participated in it at the time of the commission of acts for which such a legal entity

• was finally sanctioned for a serious offence or finally ordered to compensate for damage for a serious or repeated violation of a legal obligation,
• was ordered measures to remedy serious deficiencies in its activity,
• was not sanctioned or ordered measures to remedy, but it was a serious deficiency that was documented within the performance of supervision (e.g. by a control protocol) and which would justify the imposition of a sanction or measures to remedy, or
• had its application for membership (participation) in a regulated market organizer, professional association, chamber or association of financial service providers, including foreign ones, rejected for reasons related to reliability, or violated legal obligations for which a disciplinary penalty was imposed by such a community, or was excluded from such a community, i) who was a member of the management body, a person authorized to act on behalf of a legal entity based on another fact, substantially influenced the behavior of a legal entity or significantly participated in it, or who controlled such a person for up to 3 years
• before the issuance of a decision on insolvency of such a legal entity or before the rejection of an insolvency petition because its assets were insufficient to cover the costs of the insolvency proceedings,
• before the declaration of bankruptcy on the assets of such a legal entity or before the permission of a settlement, or
• before the final suspension or revocation of the permit to conduct business activity for reasons other than at their request or the introduction of compulsory administration in such a legal entity, j) in whom criminal proceedings for crimes mentioned in point 2.1 letter a) and point 2.2 letter a) have been initiated and these criminal proceedings are still ongoing, or k) in whom proceedings for an offence or for the imposition of a remedial measure for a serious or repeated violation of a legal obligation in connection with the exercise of a profession have been initiated and these proceedings are still ongoing, or l) who was a member of the management body, a person authorized to act on behalf of a legal entity based on another fact, substantially influenced the behavior of a legal entity or significantly participated in it, or who controlled such a legal entity and against such a legal entity proceedings under letter h) have been initiated based on acts committed during the period of activity of the person being assessed and these proceedings are still ongoing.

In cases of serious doubts about the reliability of a person acting for a financial service provider, the Czech National Bank takes into account in particular

• the intensity of the fault of the person being assessed (intentional, negligent) or whether they were punished or ordered to compensate for damage without fault,
• whether the unlawful act occurred repeatedly,
• the seriousness and consequences of the unlawful act,
• the time that has elapsed since the unlawful act,
• whether the person being assessed demonstrably alerted to the deficiency in a sufficient manner beforehand,
• whether the person being assessed ensured the remedy of the deficiency or at least attempted to remedy it,
• the reasons and circumstances under which the above facts occurred (e.g. connection with reliability, attribution of the unlawful act of a legal entity to a specific natural person). In this context, it can be concluded, for example, that personal insolvency handled by debt relief, which is not related to profession or business, may not mean the unreliability of the person being assessed.

In cases of serious doubts about the reliability of a person acting for a financial service provider mentioned under letters h), i) and l), the Czech National Bank also takes into account whether and in what way the person being assessed participated in the acts of the legal entity (whether, for example, they actively voted or conversely voted against and prevented the adoption of an unlawful decision or act or, even by their passivity, allowed or supported an unlawful decision or act). According to the above criteria, then