External supervision

Blog

3 November 2017

Supervisory board members exercise supervision over the board of directors. That is internal supervision. We often tend to forget that every company is subject to various types of external supervision as well. In the financial sector this is evident. The central banks oversee the financial sector. We all know the Inspection Public Health as well, which monitors the quality of health care on behalf of the government. This involves answering questions such as “Do the health care institutions and service providers have the right permits?”, “Do the institutions comply with the regulations?”. Similarly, there are supervisory authorities in the construction sector, for food and consumer products, and so on.

“We often tend to forget that every company is subject to various types of external supervision as well.”

How do those supervisory authorities relate to each other? That can be quite complicated, even within one sector. For instance, within the financial sector in the Dutch Caribbean alone, there are four supervisory bodies: the Central Bank of Curaçao and St. Maarten, the Central Bank of Aruba, De Nederlandsche Bank and The Dutch Authority for the Financial Markets. In our fragmented constitutional system, those supervisory authorities can step on each other’s toes before they know it. That’s what De Nederlandsche Bank recently found out in Bonaire. Because of its supervisory function with respect to an Ennia branch in Bonaire, the applicable BES legislation gave DNB the option of imposing sanctions on Ennia’s head office (in Curaçao) where appropriate. In June of this year, the Court of Bonaire issued a ruling on this matter: when exercising supervision over a financial institution in Bonaire, DNB may not without question interfere with the supervision policy of the Central Bank of Curaçao and St. Maarten. Simply put: when imposing sanctions, the external supervisory authorities must, in principle, respect the territorial borders of the autonomous countries in the Kingdom as much as possible.

For the clients of financial enterprises, banks, insurers and insurance brokers, the external supervision should have a positive effect. After all, we’re doing it all for them. Paradoxically, in our small Caribbean countries it doesn’t really work out that way. The costs of having to fulfill all of the requirements of all of those supervisory authorities make it very hard for most financial institutions to keep their branch offices in the BES open. As a result, these have disappeared rapidly over the last few years. And who’s the victim? Exactly: the same consumer whom all of this is meant to protect. That’s a good example of throwing out the baby with the bathwater.

By the way, supervisory authorities are not all-powerful. Anyone who is disadvantaged by improperly exercised supervision can apply to the court. It’s a difficult road to take, though. Both by law and based on the case law of the Supreme Court, the liability of supervisory authorities is limited. The Supreme Court takes the position that a supervisory body must have a certain degree of (policy) freedom with regard to whether or not it will intervene in a company. After all, by definition each supervisory authority will encounter a so-called supervisory dilemma. If the supervisory authority is too quick to intervene in, for example, a financial enterprise, the risk arises that, exactly because of that intervention, consumers will lose confidence in that company, causing it to go bankrupt. In that case, the bankruptcy was caused by the supervisory authority’s premature intervention. Talk about ironic: the patient is killed by the doctor! On the other hand, if the supervisory authority is too late with taking action, you also have a problem. Then everyone will say that the supervision has failed. As you can see, it’s not easy for supervisory authorities to do things right.

 

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Do you have a question about corporate governance yourself? Please e-mail it to governance@ekvandoorne.com and perhaps your question will be discussed in the next blogpost.