The credibility and long-term sustainability of the financial sector depend fundamentally on the quality, integrity and competence of those who lead it. In this context, the concept of Fit and Proper has emerged as a central mechanism for assessing the suitability of members of the governing bodies of financial institutions.

Rooted in the European regulatory framework, Fit and Proper operates as a corporate governance instrument designed to safeguard financial stability by mitigating risks associated with poor management, misconduct and conflicts of interest.

Origin and Evolution of the Fit and Proper Concept

The Fit and Proper framework was significantly reinforced by Directive 2013/36/EU (CRD IV), adopted in the aftermath of the 2008 financial crisis. The directive introduced strengthened qualitative criteria for assessing members of management and supervisory bodies within credit institutions and investment firms.

The “Fit” component refers to professional competence — including academic qualifications, relevant experience and the capacity to perform the responsibilities of the role effectively.

The “Proper” component concerns integrity, reputation, ethical conduct and independence, ensuring that board members act objectively and free from undue influence or conflicts of interest.

Why Fit and Proper Matters

The requirement to assess fitness and propriety emerged in response to serious governance failures across financial institutions, where excessive risk-taking, weak oversight and misaligned remuneration structures contributed to systemic instability.

The Fit and Proper framework seeks to:

• Promote prudent, responsible and risk-aware leadership
• Strengthen institutional resilience
• Protect stakeholders, particularly depositors and investors
• Reduce the likelihood of behaviours that may trigger systemic crises

Who Conducts the Assessment?

The assessment process typically involves three levels of responsibility:

1. The financial institution, which conducts the initial due diligence and internal evaluation
2. The national competent authority (for example, Banco de Portugal)
3. The European Central Bank, in institutions under its direct supervision
   

Candidates are required to complete a detailed suitability questionnaire, supported by a declaration of honour, covering matters such as:

• Involvement in civil, criminal or administrative proceedings
• Previous interactions with supervisory or regulatory authorities
• Situations involving bankruptcy, insolvency or financial default
• Allegations relating to money laundering or terrorist financing
• Inclusion on credit default or debtor registers

Even where no adverse information exists, institutions must document and justify their suitability assessment.

Assessment Criteria

The evaluation of a board member is based on cumulative criteria:

• Integrity and reputation — absence of criminal convictions or conduct raising serious concerns
• Qualifications and professional experience — academic background and practical expertise appropriate to the role
• Independence of judgement — freedom from relationships or circumstances that could impair objectivity
• Availability — sufficient time commitment to discharge responsibilities effectively

Independence assessments consider professional, financial and family connections with the institution, its shareholders or other board members, as well as prior roles that could create actual or perceived conflicts.

Beyond individual assessments, regulators require institutions to evaluate the collective suitability of their management and supervisory bodies.

This includes ensuring:

• A balanced mix of competencies across areas such as audit, risk management, finance, IT, cybersecurity, ESG and regulatory compliance
• Diversity of gender, age, background and professional experience

The collective dimension reinforces shared responsibility in oversight and strategic direction and aligns closely with international corporate governance best practice.

Ongoing Training and Continuous Assessment

Suitability is not a one-off determination. It is an ongoing obligation.

Financial institutions must ensure continuous professional development for board members, enabling them to remain informed about regulatory developments, emerging risks and structural changes in the financial sector, including cybersecurity, artificial intelligence and sustainable finance.

Failure to invest adequately in board training may be interpreted by supervisors as a governance weakness, particularly in fast-evolving risk areas.

Continuous learning underpins informed, prudent and forward-looking decision-making, a core principle of the Fit and Proper framework.

Link with the Internal Governance Framework

Fit and Proper requirements must be embedded within the institution’s broader internal governance model.

Institutions are expected to maintain a formal nomination and suitability policy, approved at board level and subject to internal review and audit.

This framework should be integrated with:

• ICAAP and ILAAP processes
• Conflict of interest management policies
• Remuneration frameworks
• The three lines of defence model

In many institutions, the Nominations Committee plays a central role in overseeing appointments and conducting periodic reassessments.

This integration ensures alignment between leadership capability, risk management and regulatory compliance.

Integration with ESG and Sustainability

The Fit and Proper framework continues to evolve in line with increasing regulatory focus on sustainability and responsible finance.

Supervisory authorities now expect boards to possess adequate knowledge of ESG-related risks and regulatory developments, including climate risk management, sustainable finance frameworks, CSRD and SFDR reporting requirements.

Competence in these areas is becoming increasingly relevant in suitability assessments, reflecting the strategic importance of sustainability in financial governance.

This evolution reinforces Fit and Proper as a tool not only for regulatory compliance but also for strategic and ethical accountability.

Fit and Proper as a Governance Instrument

Fit and Proper is more than a regulatory formality. It is a structural pillar of sound corporate governance in financial institutions.

It ensures:

• Compliance with ethical and prudential standards
• Higher quality oversight and strategic judgement
• Enhanced market and investor confidence
• Protection of the broader public interest linked to financial stability

Today, Fit and Proper stands as one of the most robust mechanisms available to ensure that boards of financial institutions act with competence, integrity and accountability.

However, its effectiveness depends on how it is implemented in practice. It must function as a living governance mechanism — integrated with internal controls, risk culture, supervisory expectations and sustainability objectives.

Current Challenges and the Way Forward

Despite an established regulatory framework, several challenges remain:

• Greater harmonisation of assessment criteria across jurisdictions
• Continuous evaluation throughout the mandate, not only at appointment
• Increased sensitivity to technological, cyber and ESG-related risks

The rigorous and thoughtful application of Fit and Proper principles strengthens corporate governance and contributes to building more resilient, transparent and trustworthy financial institutions committed to serving the public interest.