The 2024 Credit Institutions Law comes into effect on 1 July 2024. Compared to the 2010 Credit Institutions Law, in addition to changes related to the business activities of credit institutions (CIs), the new law also adjusts regulations concerning the members of the Board of Directors (BoD) and the board itself.

Higher standards for election and appointment of BoD members

 Article 41 of the 2024 Credit Institutions Law allows the Governor of the State Bank of Vietnam (SBV) to set requirements for the professional ethics standards of BoD members in CIs. This is in line with international standards. For instance, the Prudential Practice Guide[1] by the Australian Prudential Regulation Authority (APRA) for members of BoD in Authorized Deposit-Taking Institutions focuses on establishing ethical standards through four main elements: integrity, fairness, honesty, and independence. In Vietnam, these rules are currently being prepared by the SBV, so CIs need to follow further instructions in the coming time.

Moreover, the new law adds the condition of “having at least 5 years of direct work experience in the professional department of a credit institution or a foreign bank branch” as one of the conditions to become a BoD member.[2] As a result, a person with at least 5 years as an executive of another business (outside the banking sector) will not be considered eligible to become a BoD member. This is a point that CIs need to note to ensure compliance when selecting corresponding titles as well as to amend relevant content in their internal documents such as charters and operational regulations.

In addition, the 2024 Credit Institutions Law also adds requirements for independent members of the BoD. In particular, (i) they must not represent the ownership of shares in that CI, and (ii) neither they nor their related persons may own directly or indirectly from 1% of the charter capital or voting shares or more.[3] Both of these regulations change in a more stringent direction to ensure the independence and transparency of independent BoD members in the operation of CIs. Specifically, the 2010 Law on Credit Institutions only restricted cases of direct, indirect ownership or representation of ownership from 1% or more of the charter capital or voting shares, or only restricted cases of joint ownership with related persons from 5% or more.[4] Note that the 2024 Credit Institutions Law has also adjusted to expand the definition of “related persons” For instance, it clarifies situations involving parents, children, and siblings to include adoptive parents, stepfathers, and stepmothers.[5] This adjustment will have a significant impact on the operations of CIs as the content about related persons is intertwined in many regulations in banking activities. For example, in credit granting activities, it is necessary to collect information about related persons and control the credit limit for customers and related persons.

Additional conditions restricting holding positions for BoD members

 Besides setting higher standards for the appointment of BoD members, the 2024 Credit Institutions Law also adds restrictions for BoD members in holding their positions. Accordingly, the BoD chairman cannot concurrently be a member of the control board of that CI and another CI.[6] This can help limit potential conflicts of interest in practice. In addition, the 2024 Credit Institutions Law has divided the regulation of not holding concurrent positions for BoD members into two main groups: (i) executives of other CIs and managers of other enterprises are not allowed to be BoD members (except for certain exemptions) for non-independent BoD members, and (ii) managers of two or more other enterprises are now also not eligible to become independent BoD members.[7] These changes align with the goal of the law amendment, which is to further enhance the governance and management capabilities of Cis.

Narrowing the authorization mechanism

 There are two main points regarding authorization related to BoD members that are adjusted and supplemented in the 2024 Credit Institutions Law, including:

• The BoD chairman is only allowed to authorize another BoD member to exercise the rights and duties of the BoD chairman during his/her absence or inability to perform duties.[8] Imposing more conditions for authorization helps to align with the provisions of the 2020 Law on Enterprises.
• BoD members are not allowed to authorize others to attend BoD meetings to decide on content related to several matters such as: (i) approving the plan to contribute capital, purchase shares or capital contributions of the CI in enterprises or other CIs where the estimated capital contribution value, purchase price or book value in case of selling shares or capital contributions is below 20% of the charter capital of the CI recorded in the most recent audited financial statements or a lower ratio as specified in the Charter, or (ii) approving other contracts or transactions with a value of 10% or more of the charter capital of the CI recorded in the most recent audited financial statements or a lower ratio as specified in the Charter.[9] It can be seen that almost all important issues now cannot be authorized to decide but must be directly carried out by BoD members.

In short, the 2024 Credit Institutions Law brings many important changes for the BoD to increase transparency, accountability, and management efficiency, while ensuring that credit institutions operate in accordance with international standards, enhancing the stability and safety of the financial system.

[1] “Prudential and Reporting Standards for Authorised deposit-taking institutions”, wesite: Prudential and Reporting Standards for Authorised deposit-taking institutions | APRA.

[2] Article 41.1 Law on Credit Institutions 2024

[3] Article 41.2 Law on Credit Institutions 2024

[4] Article 50.2 Law on Credit Institutions 2010

[5] Article 4.24 Law on Credit Institutions 2024

[6] Article 43.1 Law on Credit Institutions 2024

[7] Article 43.2 Law on Credit Institutions 2024

[8] Article 71.10 Law on Credit Institutions 2024

[9] Article 72.5 Law on Credit Institutions 2024