ACA identifies problems in financial market supervision by FMA and OeNB

The Financial Market Authority (FMA) and the Oesterreichische Nationalbank (OeNB) are responsible for the financial market supervision in Austria. In principle, the two organisations fulfil their tasks and continue to develop the supervision of the financial markets. However, some problem areas are in need of improvement, as the ACA ascertained in its report “Financial Market Supervision by FMA and OeNB” ("Bankenaufsicht durch FMA und OeNB") published today. For example, the intervals between on-site inspections are too long in some cases, and exchange with other actors in the field of banking supervision is limited. The ACA audited the joint supervision by FMA and OeNB on the basis of five credit institutions, two of which were prohibited from carrying out business activities. The audit covered the period from 2018 to 2021. Relevant developments in the years prior to the audit and in 2022 were also taken into account.

The ACA assessed how the FMA and the OeNB carried out the supervision over the so-called less significant banks. The European Central Bank (ECB) can classify a credit institution as "significant" if, for example, the total value of its assets exceeds EUR 30 billion. At the time of the audit, seven banking groups were considered as "significant" and therefore under the ECB’s direct supervision. Around 400 credit institutions were considered as "less significant" in the audit period – whereas this category includes major, important Austrian credit institutions with a balance sheet total of several billion euros. For its audit, the ACA mainly selected banks which – in the ACA’s view – were associated with an increased risk that negative developments go unseen.

In the frame of its direct supervision, the FMA takes administrative decisions. For example, the FMA can impose reporting obligations or prohibit credit institutions from continuing business. The information required for taking such decisions is mainly collected by the OeNB, e.g. in the frame of analyses and on-site inspections. When the FMA imposes administrative measures, it must adhere to the principle of proportionality and is prohibited from taking excessive measures.

WKStA incompletely informed about information by whistle-blower

A number of the ACA’s recommendations for improvement are related to the case of a credit institution which was subject to insolvency proceedings in 2020. No on-site inspection of this credit institution (referred to as "Kreditinstitut 5" in the report) was carried out between 2003 and 2014. In the auditors’ opinion, an inspection should have been carried out in 2010 at the latest.

During the OeNB’s on-site inspection in 2015, the FMA received a hint from a whistle-blower. The whistle-blower claimed that the chair of the credit institution’s board acted fraudulently with the knowledge of several employees by withdrawing funds for private purposes, using fake accounts. The OeNB reviewed the information provided. In a document transmitted to FMA, the OeNB stated that it could only partially verify the accuracy of the allegations. While the on-site inspection was still ongoing, the Public Prosecutor's Office for Economic Crime and Corruption (WKStA), which had also received a hint from a whistle-blower, informed the FMA about the initiation of proceedings against the bank’s management and a holder of Prokura. The FMA informed the WKStA that the allegations made against the credit institutions could not be confirmed. However, the FMA did not enclose the document provided by OeNB, nor did it indicate that the OeNB had only carried out a limited review. According to a phone memo, the FMA asked the WKStA to "refrain from initiating investigations at present". It furthermore emerged from a memo that the FMA had orally informed the WKStA that there was "no breach of trust suspicion" against the financial institution, according to the OeNB. The ACA recommends that information should be transmitted to the investigating authority correctly and completely (as far as legally possible). In 2022, the FMA received 52 whistle-blower hints relevant for banking supervision.

Licence revoked due to malversations

When further information was received from whistle-blowers, a re-examination of the credit institution was carried out in 2020. Among other things, the OeNB uncovered massive irregularities which the bank’s management eventually confirmed in an audit report by the OeNB. The FMA prohibited the credit institution from continuing business and opened insolvency proceedings over the bank’s assets. Subsequently, the ECB revoked the licence of the credit institution.

Other points of criticism regarding this credit institution: During the on-site inspections, the OeNB documented deficiencies that presented a very high risk. The 2017 audit report did not mention transactions with management and related parties or conflicts of interest, although a board member was the (co-)owner of two companies that were borrowers of the credit institution.

Breach of duty of care

According to the FMA, the company which audited the credit institution’s financial statements was in breach of its duty of care. Two staff members of the auditing company were withdrawn from the audit "upon pressure by the FMA", while the company itself remained in charge of the credit institution’s audit until the bank’s bankruptcy. While bank auditors are not part of the state bank supervision, their reports serve as important sources of information because they examine the financial statements and issue audit certificates. Bank auditors are obliged to report to the FMA and the OeNB immediately if a credit institution is at risk, or in case of a violation of the law (among other things). The ACA recommends to the FMA and the OeNB to pay attention to the quality of the auditing services provided by the bank examiners, and to enforce cooperation with the examiners as far as legally possible.

Reactions to irregularities regarding another credit institution

In the case of another credit institution (referred to as "Kreditinstitut 3" in the report), analyses by the OeNB revealed a progressive deterioration of the risk situation. Monitoring was therefore reinforced, in particular in the years 2020 and 2021. The analyses concerned, inter alia, a suspected threat to creditors. The FMA initiated proceedings to review the qualification of the directors: A whistle-blower reported suspected wrongdoings, including violations of the “fit & proper” criteria by a member of the supervising board, to the FMA. "Fit & proper" means that the members of the board of directors and the supervising board are professionally and personally suitable for their roles. In the further course, the FMA appointed a provisional administrator as an early intervention action, and prohibited the bank’s continuation of business operations in 2021. After that, insolvency proceedings were opened over the credit institution’s assets and the banking license was eventually revoked by the ECB.

Limited access to relevant documents

The FMA and the OeNB did not provide the ACA access to all requested documents. In the view of the FMA and the OeNB, the documents would first have to be released by the ECB. However, the documents requested did not only concern banks supervised by the ECB, but also "less significant" credit institutions under the FMA’s and the OeNB’s responsibility. If the ACA is not granted access to such documents, this can impede the proper implementation of its audits of the Austrian banking supervision in the medium term.