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20th July 2021
Banking & Finance Institutional law Internal Market Justice & Litigation

Op-Ed: “Upholding Romano, eroding Meroni: the ruling of the Court of Justice in FBF” by Nathan de Arriba Sellier

A challenge against soft law, a national court asking questions about the annulment procedure, a legal requirement lacking any binding effect, measures relying on unrelated legal bases… at first glance, the FBF judgment of the European Court of Justice of 15 July 2021 (C-911/19) looks like a cabinet of oddities.

This case begins in March 2016 with the issuance of Guidelines on product oversight and governance for banking retail products by the European Banking Authority (EBA). The EBA is one of the three European Supervisory Authorities (ESAs) established in the wake of the Global Financial Crisis by the similarly worded ESA Regulations to ensure consistent application of the law and supervisory coordination. In 2014, the ESMA judgment of the Court already hit (legal) headlines on the ESAs’ intervention powers. The ESAs’ power to issue guidelines has, by contrast, a more regulatory flavour, as it is intended to flesh out EU law and ensure consistent supervision across the EU.

In September 2017, the French supervisory authority ACPR published a Notice on its website confirming its compliance with the EBA’s Guidelines. The Notice mentioned that those Guidelines are applicable for credit institutions, payment institutions and e-money institutions under its supervision. The French Banking Federation (FBF) challenged this Notice before France’s Council of State (Conseil d’Etat) as it claimed that the EBA did not have the competence to adopt such Guidelines in the first place. In this context, the Conseil d’Etat referred three questions to the Court of Justice about the justiciability and the validity of the EBA’s Guidelines. These three questions raised in essence another one, which is at the centre of this judgment: what is the legal nature of such guidelines? Are they pure soft law or measures that have binding legal effects? This question will be examined first, before turning to the more particular issues dealt by the Court.

1. The Legal Nature and Justiciability of guidelines

To examine the legal nature of the EBA’s Guidelines, the Court considered the test it developed in Belgium v Commission (C-16/16 P). Firstly, the Court looked at the wording of the EBA’s Guidelines, according to which they set ‘the EBA[‘s] view of appropriate supervisory practices within the European System of Financial Supervision or of how Union law should be applied in a particular area’. The Court also notes that these Guidelines are formulated in non-imperative terms (‘should’). It finally considers that the legal regime of guidelines is very close to the regime of recommendations under the ESAs Regulations. The Court deduced that guidelines lack binding force, in the same way that recommendations do, pursuant to Article 288(5) TFEU. That homonymy between Article 288(5)-recommendations and Article 16-recommendations under the ESAs’ Regulations is the main argument the Court used in the BNB case (C-501/18) to rebuff the claim that the EBA’s recommendations have legal effects. However, the homonymy hides a variety of legal regimes among soft law measures. By contrast to Article 288(5)-recommendations, the ESAs’ recommendations and guidelines do not solely embody ‘a power to exhort and to persuade’ as the Court ruled.

The ESAs’ guidelines and recommendations indeed differ in key aspects from Commission’s recommendations, as their legal regime is refined by the legislation. In the ESAs’ Regulations, the legislature attached to these instruments a ‘comply or explain’ requirement that addressees (supervisory authorities and/or market actors) cannot simply ignore if they are not persuaded; they ‘shall make every effort to comply’. If they fail to comply, addressees must justify non-compliance. Furthermore, ESAs are required to make public whether supervisory authorities comply with guidelines and recommendations. ESAs can also decide to publish these authorities’ reasons for non-compliance. Those who do not abide can thus be named and shamed, where appropriate. Also, guidelines and recommendations have to be adopted by the same QMV procedure as the drafts of regulatory and implementing technical standards that will become hard law upon endorsement by the Commission. This is evidence of the regulatory importance attached to these measures of soft law.

Non-compliance by supervisory authorities is, therefore, very rare. By complying with the ESAs’ guidelines and recommendations, supervisory authorities harden their legal effects as they integrate their substance in their rulebooks and supervisory practices. As Advocate General Bobek emphasised in his Opinion (brilliantly summarised here by Mariolina Eliantonio), ‘the “nominal addressee” becomes an “effective enforcer”’ against the ‘real addressees’, market actors. This is exactly what happened in this case and the reason why FBF challenged the validity of those guidelines. The Court refuses to acknowledge that trickle-down effect, minimising national supervisory authorities’ broad powers and discretion.

The peculiarities of the guidelines’ legal regime in the ESAs’ Regulations were not sufficient for the Court to recognise that guidelines may bring about legally binding effects. For the Court, they only represent the ‘power to exhort and to persuade’ that it admitted in Belgium v Commission. This conclusion was foreseen by Advocate General Bobek, given the Court’s repeated refusal to recognise a distinction between acts having binding force and legal effects. Furthermore, had the Court decided to recognise the potential binding legal effects of guidelines, it would have undermined its own non-delegation doctrine. In Romano (98/80), the Court ruled that EU bodies like the EBA could not be empowered to adopt acts of general application ‘having the force of law’. This power is reserved to EU institutions, pursuant to the Treaties and the principle of institutional balance. Therefore, by cementing the soft law character of the ESAs’ guidelines, the Court preferred to retain the legal fiction established in Romano, rather than recognising the full thrust of EU agencification.

The finding of the Court regarding the legal nature of ESAs’ guidelines led it to draw some conclusions regarding their justiciability. As soft law measures, they lie outside the scope of Article 267 TFEU, preventing an action for annulment before the Court. That is essentially the solution of Belgium v Commission applied to soft law measures other than Commission recommendations. By contrast, measures like EBA’s Guidelines, considered by the Court as ‘Union acts of general application’ lacking binding force may be challenged indirectly through a preliminary reference in order to guarantee the ‘complete system of legal remedies’ established by the Treaties. This also derives from the Court’s ruling in Grimaldi (C-322/88)  that national courts are required to take into consideration soft law measures fleshing out EU law. Implementing measures of national law against the particular litigants involved in the dispute in the main proceedings are not necessary, as long as the preliminary questions were asked in the context of a genuine dispute where the validity of a EU act is challenged. Therefore, the FBF could very well challenge the validity of EBA’s Guidelines before the Conseil d’Etat in the context of its action against ACPR’s notice.

2. The Validity of EBA’s Guidelines

The validity part of the judgment may be the most controversial, but also the most technical. In this respect, it was the view of the Commission and the Advocate General that the EBA’s Guidelines lacked a legal basis and, therefore, should be rendered invalid by the Court. The EBA’s Guidelines make reference to four legal bases: the Capital Requirements Directive (CRD IV), the Payment Services Directive (PSD), the e-Money Directive, and the Mortgage Credit Directive (MCD). The legal bases in the first three acts are provisions similarly worded on corporate governance. However, these provisions do not deal with the governance or supervision of banking retail products, which is unsurprising given their acts’ prudential focus. Advocate General Bobek strongly disputed any amalgam between corporate governance and product governance and oversight, which is the subject matter of the EBA’s Guidelines. Taking the Markets in Financial Instruments Directive (MiFID II) as an example, the legislature clearly integrated requirements related to product governance in the provision setting organisational requirements for investment firms. That is not the case in the CRD IV, the PSD and the e-Money Directive. By contrast, the MCD provision referred to by the EBA’s Guidelines as its fourth legal basis sets conduct of business requirements when a person engages in ‘manufacturing credit products or granting, intermediating or providing advisory services on credit’. The Commission, like the Advocate General, considered that only that provision could perhaps be considered as a legal basis for guidelines on product governance and oversight, such as the EBA’s in this case. As a result, the scope of the EBA’s Guidelines should have been reduced a maxima to banking retail products linked to credit mortgages.

Yet, the Court took a very different, and liberal view, while stating that the EU legislature precisely framed the EBA’s power to issue guidelines, on the basis of objective criteria. The Court introduced, in view of the ESAs’ Regulations, a teleological interpretation of ESAs’ power to issue guidelines ‘to contribute to the establishment of high-quality common regulatory and supervisory standards and practices’ and ‘to contribute to the consistent application of legally binding Union acts, in particular by contributing to a common supervisory culture, ensuring consistent, efficient and effective application’ of EU law. The Court further referred to EBA’s statutory objectives of ‘ensuring that the taking of credit and other risks are appropriately regulated and supervised’ and ‘enhancing customer and consumer protection’. Thus, the Court focused on the legal basis for the EBA to issue guidelines, rather than on the legal bases for the EBA’s Guidelines on product governance and oversight. It, thus, sets a very different analytical framework than the one adopted by the Commission and Advocate General Bobek.

Having done that, the Court first emphasises that the EBA’s Guidelines seek to contribute, via product governance and oversight, to improving corporate governance. This enables the Court to determine that the EBA’s Guidelines relate to matters linked to corporate governance. Then, the Court examined whether the EBA’s Guidelines enter within the scope of their substantive legal bases. Yet, interestingly, the Court makes use of Article 1(3) of the ESAs’ Regulations. That provision enables the ESAs to act in the field of activities of the market actors they contribute to supervise ‘in relation to issues not directly covered by the legislative acts (…), including matters of corporate governance, auditing and financial reporting, (…) provided that such actions are necessary to ensure the effective and consistent application of those acts’. Thus, the Court does not conclude that EBA’s Guidelines fall within the scope of the legal bases they refer; rather, the Court considers that the Guidelines ‘may be considered necessary to ensure the effective and consistent application’ of those provisions. Therefore, they fall within the EBA’s scope of application. Finally, the Court determines that the EBA’s Guidelines abide by the specific legal framework set by the EU legislature for EBA to exercise its power of issuing guidelines and recommendations, given that they have as their object consumer protection, the supervision of financial risks and the establishment of consistent, efficient and effective supervisory practices in the European System of Financial Supervision. As a result, the EBA’s Guidelines are valid in the eyes of the Court.

This decision is at odds with the Meroni doctrine. Scholars of European law see it as their own Schrödinger’s cat, a judicial doctrine that can be both considered as dead and alive. Under Meroni (9/56), delegated executive powers cannot entail policy discretion and should be ‘exactly defined and entirely controlled’ by the delegating institution. The policy discretion that cannot be delegated was then – at the time of the European Steel and Coal Community – defined by the Court as the ability to accommodate different objectives, depending on the circumstances. Yet, the Court refrained from determining how much discretion was too much discretion. By adopting a teleological interpretation in the matter of the EBA’s power to issue guidelines, the Court turns its back on Meroni, which already suffered a heavy blow in the ESMA judgment (C‑270/12). Although the Court keeps insisting on the precise framing of agencies’ powers by the legislature, it very much contributes with this case to stretching that legal framework.

The non-delegation doctrine of EU administrative law emerges crippled from this judgment; while the Court upheld Romano where it was seriously threatened, it further eroded the credibility of Meroni by taking a contrarian view in a case with (very) low substantive stakes.

 

Nathan de Arriba-Sellier is a PhD Researcher at Erasmus University Rotterdam and Leiden University.

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