Q&A on supervisory boards at payment institutions and electronic money institutions

1. The institution has a director-majority shareholder/dominant shareholder (e.g. with a majority interest or substantial minority interest, or specific special rights)

If an institution has a majority or dominant shareholder, there is a risk of the decision- making process being dominated by that shareholder, as a result of which their part interest will take precedence over other part interests in the institution. This is when it is particularly important that the interests of all stakeholders in the payment institution or EMI are appropriately safeguarded. By being assigned a role in the decision-making process, an independently operating supervisory board can exercise countervailing power, as part of which it is expected to carefully weigh all part interests in the institution, making allowance for group interests as well as external interests, such as those of creditors of the payment institution or EMI.

2. The internal control structure is weak

An institution’s internal control structure qualifies as weak if a single officer is responsible for multiple internal control functions (e.g. compliance and risk), if control functions have been outsourced, or if members of the management body wear dual hats (e.g. risk and sales, or finance and risk).
Although weaknesses in the internal control structure are to be mitigated first and foremost by the management body and in the internal control structure itself, a supervisory board can be instrumental in driving this effort, the reason being that it is responsible for supervising the system of management functions, including internal control. Supervisory board involvement in the internal control structure can promote risk awareness and risk management within the institution. This is how a supervisory board will help an institution to maintain an adequate and balanced organisational structure.²

A payment institution or an EMI has a complex organisational or control structure if its managing directors fulfil dual-hat roles within the group of which the institution is a member, if there is a risk of the formal control structure not corresponding to the effective control structure, and if the members of the group are in the habit of outsourcing services or functions to each other.

Managing directors with dual-hat roles within a group may experience conflicts of interest, for instance if they fulfil roles at both the payment institution or EMI and the parent institution, and the payment institution or EMI and the parent institution have conflicting interests. Also, two managing directors of a payment institution or an EMI may not be able to operate entirely independently of each other because they fulfil roles at the parent institution that cause them to have a hierarchical relationship. The presence of a complex organisational or control structure may pose a risk to ensuring sound and ethical operational management, potentially resulting in conflicts of interest. These risks can be mitigated by having in place a supervisory board, as it is responsible for overseeing the adequate organisational and control structure of the payment institution or EMI (including adequate allocation of duties and responsibilities, prevention/management of conflicts of interest, and assessment of gaps between formal and effective governance) as well as the institution’s compliance with the relevant legislation and regulations. This is how a supervisory board will help an institution to maintain an adequate and balanced organisational structure.