Two CJEU cases provide clarity on supervision of credit institutions and cooperation on deposit guarantee schemes

RegCORE Client Alert | Banking Union

QuickTake

On 7 September 2023, the Court of Justice of the European Union (CJEU)For sake of good order the CJEU is the judicial branch of the EU and is comprised of two separate courts:
(1) the Court of Justice (informally also referred to as the European Court of Justice (ECJ) which hears applications from national courts for preliminary rulings, annulments and appeals. The ECJ is comprised of one judge from each EU Member State and 11 advocates general, of which AG De La Tour is one; and
(2) the General Court (CGEU), which hears applications for annulment form individuals, corporates and, less commonly, national governments (focusing on matters such as competition law, state aid, agriculture and trademarks).Show Footnote released (i) a judgment concerning powers to withdraw authorisations of credit institutions and (ii) an opinion on deposit guarantee schemes on “sincere cooperation” between EU Member States concerning transfer of deposit guarantee scheme (DGS) contributions. As assessed in this Client Alert, the CJEU’s publications on 7 September 2023 provide clarity on key matters of law affecting how EU Banking Union supervision as well as EU-wide resolution is conducted by the respective competent authorities along with their supervisory expectations.

The CJEU is the chief judicial authority of the EU and thus oversees the uniform application and interpretation of EU law, in cooperation with the national judiciary of the Member States. The CJEU is also tasked with resolving legal disputes between national governments and/or EU institutions on behalf of individuals, corporates or organisations whose rights have been infringed. As such, the CJEU is no stranger to assessing financial services matters and providing clarity and certainty to parties on how EU law is to be interpreted. In many instances, the CJEU’s rulings as well as Opinions of its advocate generals (AG) impact how financial services firms are supervised. This is certainly the case with the publications from 7 December 2023.

Nevertheless, it should be noted that the CJEU has limited power concerning the review of decisions made by the European Central Bank (ECB). Where decisions are taken by EU institutions, including the ECB, also in its capacity as the head of the Single Supervisory Mechanism (hereafter ECB-SSM), applicants to the CJEU have to make an explicit or implicit plea of illegality of the underlying provision and or allege a breach of the principles of proportionality, in order to be heard by the CJEU.See judgment of 16 May 2017, T-122/15, Landeskreditbank Baden-Württemberg - Förderbank v ECB, EU:T:2017:337, para. 38).Show Footnote In cases where such argument is raised with regards to Art. 277 Treaty on the Functioning of the EU, the CJEU reviews the consistency with EU primary and secondary law.See judgment of 13 July 2018, T-733/16, La Banque postale v ECB, EU:T:2018:477, para. 35.Show Footnote Thus, it should be kept in mind that the CJEU has a limited scope of judicial control when it comes to the ECB, reviewing only the discretionary decisions brought forward by the applicants.

ECB-SSM powers to withdraw and divisions of responsibilities with NCAs

In its decision on 7 September 2023,Available here.Show Footnote the CJEU dismissed an appeal of Versobank AS, an Estonian credit institution, brought against a judgment of the CGEU that upheld the decision of the ECB-SSM, to withdraw Versobank’s authorisation to operate as a credit institution (collectively hereafter the Versobank Decision).

Credit institutions i.e., banks, for Banking Union purposes are categorised either as “significant credit institutions” (SCIs) or “less significant institutions” (LSIs). SCIs are supervised directly by the ECB-SSM and indirectly by the respective national competent authorities (NCAs). In contrast, LSIs are supervised directly by NCAs and indirectly by the ECB-SSM. The ECB-SSM is the ultimate decision-maker in granting and withdrawing authorisations for all credit institutions operating in the Banking Union and thus for LSIs and SCIs. The relevant powers are conferred to the ECB-SSM by relevant Banking Union legislation, notably the SSM RegulationCouncil Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.Show Footnote, the Capital Requirements Regulation and the Capital Requirements Directive (CRD).Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.Show Footnote

Versobank was categorised by the ECB-SSM for Banking Union purposes as an LSI. Accordingly Versobank was indirectly supervised by the ECB-SSM and directly supervised by the NCA – in this case the Estonian Finantsinspektsioon (Financial Supervisory Authority – FSA). Versobank was placed under the prudential as well as conduct of business supervision of the FSA, which had competence in relation to monitoring of compliance with anti-money laundering (AML) and countering terrorist financing (CTF) rules.See judgment of 7 September 2023, C-803/21 P, Versobank vs ECB, EU:C:2023:630, para. 21.Show Footnote

In summary, the arguments leading to the Versobank Decision claimed that the ECB was not competent to withdraw a credit institution’s license on the grounds of AML/CTF concerns alone. This argument was methodically contradicted in the CJEU’s considerations. Accordingly, the Versobank Decision definitively confirms the broad and exclusive competence of the ECB-SSM’s powers to withdraw authorisations from credit institutions, including solely for AML/CTF concerns.

Prior to the Versobank Decision the supervisory consequences (for both SCIs and LSIs) and withdrawal of authorisations strictly for breaches had not been as clearly confirmed by the CJEU. As an example, in 2022, the CJEU for the first time ruledCase T-797/19 Anglo Austrian AAB Bank and Belegging-Maatschappij ‘Far-East’ v ECB, available here.Show Footnote on a withdrawal of authorisation of a banking institution on account of serious breaches of legislation on AML/CTF and infringement of the rules on the governance of credit institutions.

Importantly, in the Versobank Decision, the CJEU held that the ECB-SSM was entitled to rely on the findings of the FSA regarding Versobank’s serious and repeated breaches of AML/CTF rules, as sufficient grounds for withdrawal of authorisation. The CJEU further found that the withdrawal of authorisation was an appropriate and proportionate measure, given the gravity and persistence of Versobank’s breaches, the risk of undermining public confidence in the financial system and the lack of less onerous measures to restore legality.See C-803/21 P, EU:C:2023:630 paras.140,141 in connection with para. 34.Show Footnote

Advocate General Richard de la Tour Opinion on “sincere cooperation” between EU Member States concerning transfer of DGS contributions

On 7 September 2023 an Opinion of AG Richard De La Tour (the AG’s Opinion) was published in the proceedings of Latvia v Sweden (Case C-822/21).Opinion available here.Show Footnote Although AG Opinions are not generally binding, they are influential and as such often followed by the CJEU’s deliberations in the case(s) to which they relate.

The AG’s Opinion has important implications for the EU’s banking sector, including beyond the Banking Union, as it concerns the interpretation and application of the EU’s Directive 2014/49 on DGS (the DGSD) with regards to disputes between Member States in case of a transfer of bank branches and their respective contributions i.e., funding. The DGSD applies to the entirety of the EU.

The DGS under the DGSD in general comes alongside the first pillar of the banking union, SSM, and the second pillar, the Single European Resolution Mechanism (SRM). While the SSM and the SRM are exceptionally strongly institutionalised at Union level, deposit protection, DGSD, is decentralised through national systems whose actions are largely harmonised and which are, by law i.e., including beyond the DGSG, required to cooperate closely. Any further centralised administration of deposit protection, whether as part of the Banking Union’s missing third pillar, the European Deposit Insurance Scheme (EDIS) or otherwise, has (regrettably) so far failed due to political differences between the Member States and the EU Commission.Berger: The new deposit guarantee scheme BKR 2016, 144,144-145.Show Footnote

The AG’s Opinion relates to a dispute between Latvia and Sweden over the transfer of contributions paid by a Swedish bank, Nordea Bank, to the Swedish DGS, in respect of its branches located in Estonia, Latvia and Lithuania, which were transferred to another bank in 2017. Sweden is not a member of the Banking Union but Estonia Latvia and Lithuania are.

The governments of the Republic of Estonia, the Republic of Lithuania and the European Commission (the Commission) intervened in support of the Republic of Latvia. Equally, it is worth noting that the Estonian, Latvian and Lithuanian DGS authorities initiated a mediation procedure with the Swedish DGS authority under the aegis of the European Banking Authority (EBA). Such procedure constitutes an informal and flexible dispute resolution process. The EBA h closed the case, in the absence of an agreement, in 2019. By way of an application dated 30 December 2021, the Republic of Latvia brought an action against the Kingdom of Sweden for failure to fulfil its obligations pursuant to Article 14(3) of the DGSD and Article 4(3) of the Treaty on European Union (TEU).

Article 14(3) DGSD states that unless excluded from a DGS, if a credit institution ceases to be a member of a DGS and joins another DGS, the contributions paid during the 12 months preceding the end of the membership shall be transferred to the other DGS.

The duty of “sincere cooperation” stipulated in Article 4(3) TEU includes a mutual legal obligation for the EU and its Member States “to assist each other in carrying out the tasks which flow from the Treaties”. This rather general principle has often been invoked before the CJEU to ensure close cooperation between the EU and the Member States and sincere (or loyal) cooperation between the Member States and the EU institutions is a key constitutional principle of EU law.

The AG’s Opinion rejected Latvia’s argument that Sweden had breached the principle of sincere cooperation under Article 4(3) TEU, as the AG found that Sweden’s conduct did not constitute a distinct infringement from the alleged violation of Article 14(3) of the DGSD, and that there was no evidence of a general and consistent practice by the Swedish DGS to prevent the transfer of contributions to another DGS.

The AG’s Opinion proposes that the CJEU should declare the action admissible, but should dismiss it on the merits, taking into account the fact that a purely teleological/doctrinal interpretation of an EU directive, such as the DGSD, cannot form the basis of an action for failure to fulfil obligations where the clear provisions of that directive have been transposed literally and there is no evidence of a contrary, general and consistent practice. Accordingly, aside from recommending the CJEU dismiss the case, AG Richard De La Tour proposes Latvia pay the costs and that Estonia, Lithuania and the European Commission bear their own costs.

The Opinion of the AG, if followed by the CJEU, would confirm the discretion of the Member States to organise the collection and transfer of contributions to the DGSs and the limited harmonisation achieved by the DGSD in this regard. It would also imply that the transfer of contributions may not reflect the transfer of risk or liability between DGSs, and that the DGSs of the host Member States may bear a higher burden of guaranteeing the deposits of the transferred branches without receiving the corresponding contributions from the DGSs of the home Member States. This may affect the financial stability and solidarity of the DGSs, as well as the level of protection of the depositors, in the EU’s banking sector. While the AG’s Opinion raises fundamental questions on the fragmented implementation and interpretation of the DGSD across the EU and, in the Banking Union the missing pillar of EDIS, it also elegantly and (even if frustratingly) indirectly points to the position that it is the EU’s co-legislators as well as respective EU authorities, that are able to remedy the relevant questions.

In a similar caseDetails available here.Show Footnote between the Spanish DGS and the Belgian DGS, the EBA was able to find a binding mediation between those two DGSs. Called upon on behalf of the Spanish DGS to assist in settling the disagreement between the two DGS, the disagreement that the EBA adjudicated revolved around diverging views on the nature and extent of contributions which should have been considered, in accordance with Art. 14(3) DGSD, as paid to the Belgian DGS in the twelve months prior to the change of DGS membership. In this mediation, the EBA held that the Belgian DGS should transfer the contributions to the Spanish DGS.

In that settlement, the EBA found that deficiencies in cooperation and information sharing between the parties resulted in the DGS only addressing the need for a transfer of contributions long after the move of the credit institution had taken place. Therefore, the EBA also emphasised that this decision also requires the DGSs to develop and implement enhancement plans in this area.

Outlook and next steps

While the principles and context of the ECB-SSM’s powers as well how and when these are exercised are well understood, even if often contested, in the 10 years that the ECB-SSM has led the Banking Union, the Versobank Decision further clarifies the relationship between the ECB-SSM and the NCAs within the SSM, as well as the supervisory consequences and withdrawal of authorisation solely on grounds of AML/CTF breaches. It remains to be seen whether the Versobank Decision will translate into even more supervisory scrutiny by NCAs and the ECB-SSM of LSIs, but it may well prompt LSIs to ensure their AML/CTF compliance more fully meets EU and national law as well as the supervisory expectations set at the NCA as well as ECB-SSM level.

In the context of DGS’ level of cooperation, the AG’s Opinion points out just how limited the implementation of the DGSD is, and that there’s still need for improved harmonisation within the EU including ensuring cooperation is actually sincere. It is certain that Member States are still going to have to either settle their cases concerning DGS matters or hope for better harmonisation being introduce through new EU rulemaking (including by maximum harmonisation focused Regulations as opposed to minimum harmonisation level Directives) in the future. The Commission had already announced on 18 April 2023, a legislative proposal on improving the operation of DGS in the context of the CMDI framework, as covered separately in our standalone EU RegCORE Client Alert (available here).See the EU Commission’s policymaking timeline, here.Show Footnote Thus, it remains to be seen how the DGS framework will develop and whether a more satisfactory harmonisation will move from legislative proposal to actual implemented reality.

In both instances discussed above, affected financial services firms will want to note that these two CJEU publications, while not directly statutory-based law-making, provide welcome clarity and certainty on legal concepts with precedent-binding character. The CJEU’s publications therefore affect both SSM supervision and SRM resolution of firms as well as compliance considerations in the context of the wider European system of financial supervision beyond the Banking Union.