The new Law governing Credit Institutions and Financial Companies (the “Law“) – Law no. 20/2020, December 31, which revokes Laws no. 15/99, November 1, and no. 9/2004 July 21- will enter into force this coming March and establishes a period of 90 days for credit institutions and financial companies, namely banks, microbanks and credit cooperatives in operation to adapt to this Law provisions.
New terms such as “managing director”, “non-executive directors”, and “governance system” – commonly referred to as corporate governance – have been specifically introduced in this Law, indicating a tendency by the legislator to bring the language of the Law closer to “the Mozambican banking reality”. Other terms seem to want to indicate more bureaucracy and a greater accumulation of requirements and accountability for “the individuals” who carry out their activities within the scope of the legislation governing Credit Institutions and Financial Companies; and of course, with a reinforcement of the powers of the Regulator – the Bank of Mozambique.
Let’s see, as far as the administration of Credit Institutions and Financial Companies (“CIFC”) is concerned the introduction and reference in this Law to the figure of the managing director (administrador-delegado) does not raise any questions, being easy to perceive and contextualize within the provisions of the Commercial Code – Articles 432.4 and 435.2. That is, the Board of Directors delegates certain matters relating to the company administration to a certain director (or to some directors, in the case of the Executive Committee), without being excluded from its powers and liabilities.
This alignment with the commercial, however, is no longer the case for the non-executive directors introduced by this Law, i.e. non-executive members that make up the composition of the Board of Directors (or equivalent body) as provided for in Article 14 of the Law.
Now, the Law provides in its Article 12 as one of the requirements for the establishment of CIFC’s the adoption of the form of a company by shares (sociedade anónima) [with exception of credit cooperatives that adopt the form provided for in the respective governing legislation, and which requirements will not be analyzed at this moment]. Pursuant to our legal framework public companies by shares are regulated by the commercial law (Articles 1 and 2 of the Commercial Code).
Article 418 of the Commercial Code regulates the composition of the Board of Directors of companies by shares, but without any reference or distinction between executive and non-executive directors. Taking as basis a general knowledge of the powers of the Board of Directors of any commercial company and, at the same time, looking at the competences of the Board of Directors of companies by shares as listed in Article 431 of the Commercial Code, we find the competences of the non-executive directors of an CIFC as now provided for in the Law difficult to implement without a clear legislative basis for listing their powers.
What role should non-executive directors play in an CIFC? Are non-executive directors independent? What liability have non-executive directors? And the commercial law not providing for any definition or distinction to what extent will it be possible to ensure compliance with the provisions of Article 31.5 of the Law establishing that “members of the administration bodies of credit institutions and financial companies are not allowed to accumulate more than one executive position with 2 non-executive positions, or four non-executive positions”? These are questions still open in the Law.
The provisions of Article 29.5 of the Law providing that “members (…) of the administration body who do not exercise executive functions must have the skills and qualifications to enable them to make a critical assessment of the decisions taken by the administration body and effectively supervise its functions” are relevant in seeking answers to these questions, as these seem to indicate, on the one hand, a clear independence of these non-executive members and, at the same time, a supervisory role; but also an accountability over the administration of the CIFC, which will require these directors to be regularly informed about the company’s life.
The approval, implementation, and enforcement of effective governance systems for each CIFC, toward ensuring and effective and prudent administration, including the separation of duties within the organization, is therefore of fundamental importance in the context of this Law. So it is that [in accordance with the combined provisions of Articles 17 and 106 of the Law] CIFC’s have now the duty to provide information about the governance system to the Bank of Mozambique – which must include a clear organizational structure, with defined, transparent, and coherent lines of responsibility – in line with the minimum content to be defined [by Notice] by the Bank of Mozambique.
Looking into the questions that these Law leaves open as far as non-executive directors are concerned, it is important to highlight the role now attributed in the Law to the CIFC’s administration and supervisory bodies regarding the organization and definition of the governance system, ensuring, in accordance with the applicable legislation, the internal regulation of the respective organizational structure, including the role and powers of the now foreseen non-executive directors.
However, the question of liability remains open, since non-executive directors do not cease to be directors of the company within the scope of the commercial law, and are therefore jointly and severally liable before the company for damages caused to them by acts or omissions performed [with disregard for legal or statutory duties], unless they prove that they acted without fault, as provided in Article 160 of the Commercial Code.
The Law also brings as a novelty the reference to holders of essential functions, which covers those positions whose holders, not belonging to the administrative or supervisory bodies, perform functions that give them significant influence in the management, namely and at least those responsible for the areas of compliance, internal audit, control and risk management, as established in Article 15 of the Law. [Other essential functions may be defined by the CIFC itself or by the Bank of Mozambique Notice.]
Says the Law that CIFC’s must identify these holders of essential functions however without making reference to the “how”, “when” and “in what format” this identification should be made. Still, the reference to those responsible for these functions seems to indicate that the individuals who perform these functions [usually managers (directores)] are now, together with the members of the CIFC’s governing bodies, subject to the scrutiny of the Bank of Mozambique.
This understanding is supported by the wording in Article 26.6 of the Law [which subjects to evaluation the exercise of the office of member of the administration and supervisory body of the CIFC, upon the special registration process and during the course of the mandate (to ensure the respective adequacy)] which “is extended, with the necessary adaptations, to the holders of other non-mandatory bodies created by the institution [CIFC] in the light of its articles of association, as well as to the holders of essential functions, under the terms defined by the Bank of Mozambique”.
Article 32 of the Law further provides that “the Bank of Mozambique may, at any time, make a new assessment of the suitability of the members of the administration and supervisory bodies and of the holders of essential functions of credit institutions and financial companies, based on any supervening circumstances”.
It should be noted that this same Article 32 deals with the lack of supervening suitability as regards, essentially, the requirements of suitability, professional qualification, independence or availability [of the members of the corporate bodies], verified or verified after the special registration.
How then to frame this reference to those responsible for compliance, internal audit, control and risk management in this article? Did the legislator want to subject to special registration also those responsible [for now] for the areas of compliance, internal audit, control and risk management?
It is worth stressing that the special registration of members of corporate bodies may be cancelled if it is later concluded that the requirements of professional suitability and qualification are not met. If parallelism and special registration of the holders of essential functions is accepted, to what extent will these provisions of the Law not bring to light labour issues?
These are more open questions within the scope of this Law.
Last but not the least, the Law also more deeply regulates matters of professional qualification of the members of the management and supervisory bodies of the CIFC’s, and from now on not only the academic qualifications are relevant, but also the specialized training appropriate to the position to be exercised and the professional experience, the latter being presumed when the individual concerned has previously held positions in the financial field, with recognized competence in economic, legal or management matters.
