Category Archives: ECB

The ECB’s growing interpretation of EU banking regulation. The same person may not occupy at the same time the post of chairman of the board of directors and that of ‘effective director’ in credit institutions subject to prudential supervision.

Judgment
T-133/16
24.04.2018
PartiesJurisdictionFormationJudge RapporteurAdvocate GeneralSubject-matter
Preliminary rulingCaisse régionale de crédit agricole mutuel Alpes ProvenceGeneral CourtSecond ChamberM. Prek /Economic and monetary policy — Prudential supervision of credit institutions
KeywordsPrudential supervision of credit institutions — Person effectively directing the business of a credit institution — Article 13(1) of Directive 2013/36/EU and the second paragraph of Article L. 511-13 of the French monetary and financial code — Prohibition on combining the role chairman of the management body of a credit institution in its supervisory function with the role of chief executive officer of the same establishment — Article 88(1)(e) of Directive 2013/36 and Article L. 511-58 of the French monetary and financial code
Significant pointsCrédit Agricole is a non-centralised French banking group which is comprised, inter alia, of regional agricultural credit union branches. Four of those regional branches wished to appoint the same persons as chairman of the board of directors and as ‘effective directors’. The European Central Bank (ECB), which is responsible for the prudential supervision of Crédit Agricole, approved the appointment of the persons concerned as chairmen of the board of directors but objected to them carrying out at the same time the function of ‘effective directors’.

The ECB considered that the functions enabling a person to obtain approval as ‘effective directors’, in accordance with French and EU law, were executive functions (such as those of the chief executive officer), distinct from the functions entrusted to the chairman of the board of directors. In principle, according to the ECB, there has to be a separation between the exercise of executive and, non-executive functions within a management body.

The four regional branches brought proceedings before the General Court for the annulment of the ECB’s decisions. In essence, they argued that the ECB had not correctly interpreted the concept of ‘effective director’ by limiting it to members of the senior management with executive functions.

In its judgment, the General Court rejected the appeals of the four regional branches and confirmed the approach taken by the ECB.

The General Court analysed the concept of ‘effective director’ of a credit institution in the light of Article 13 of Directive 2013/36/EU on the prudential supervision of credit institutions (CRD IV). On the basis of a textual, historical, teleological and contextual interpretation of Article 13 of Directive 2013/36/UE, the General Court ruled that the concept of « effective director » refers to the members of the management body who are part of the senior management of the credit institution. In particular, the General Court referred to the objective pursued by the EU legislature concerning good governance. That objective involves effective oversight of the senior management by the non-executive members of the management body, necessitating checks and balances within the management body. The effectiveness of this supervision could be jeopardised if the chairman of the board of directors in its supervisory function, while not formally occupying the role of chief executive officer, was also responsible for the effective direction of the business of the credit institution.

The General Court considered that the ECB also correctly applied Article 88 of Directive 2013/36/EU, which provides that the chairman of the management body in its supervisory function of a credit institution (such as the chairman of the board of directors) may not exercise at the same time, unless by express authorisation of the competent authorities, the function of chief executive officer in the same institution.

Lastly, the General Court observes that the ECB also correctly applied the provisions of the Code monétaire et financier français (French monetary and financial statute), as interpreted by the French Conseil d’État. In that regard, the General Court noted that Article L. 511-58 of the CMF is broader in scope than Article 88(1) (e) of Directive 2013/36 in that it precludes not only the ‘chief executive officer’ but also ‘a person carrying out equivalent management duties’ from chairing the board of directors. It stressed that the broader scope of Article L. 511-58 of the CMF does not mean that it is incompatible with Article 88(1)(e). As the ECB correctly pointed out in the contested decisions, recital 54 of Directive 2013/36, allows the Member States to introduce extra principles and standards to ensure effective oversight by the management body. Furthermore, the extension of the prohibition on combining the functions of chairman of the board of directors with those of chief executive officer to a ‘person carrying out equivalent management duties’ was judged consistent with the objectives of Directive 2013/36, namely, the objective of effective oversight of the senior management by the non-executive members of the management body, which involves a balance of powers within the management body.
NoteworthyThis case shows how the ECB is progressively developing its interpretation of various provisions of EU banking law when exercising its supervisory powers and under the judicial review of the EU courts.

In this case, the ECB considered that the same person may not occupy at the same time the post of chairman of the board of directors and that of ‘effective director’ in credit institutions subject to prudential supervision. Its view has been confirmed by the EU General Court.

By finding this, the ECB has complied with the clear wording of Article 88 (1) e) of the CRD IV Directive. I fully agree with this interpretation as stated in my book on EU banking and financial law (Droit bancaire et financier européen, 2e éd., Larcier, 2016, p. 437, paragraph 734). Such requirement has been implemented into Luxembourg law in advance by the CSSF Circular 12/552 on central administration, internal governance and risk management in 2012 (see point 32).

The ECB has also supported the idea that CRD IV is, as a general rule, a directive of minimal harmonization and that the Home Member State of a credit institution is allowed to impose more stringent requirements, therefore. This was the case here as French Law extended the incompatibility prohibition laid down in CRD IV to any executive mandate for the chairman of the board of directors within the same bank.

Beyond these two statements, the case sheds some light on the ECB’s power of interpretation of EU banking and financial law. This is of relevance not only for banks subject to its direct supervision but also to banks of EU Member States not belonging to the EUROZONE as well to other financial operators. For example, the governance rules laid down in CRD IV under Article 88 (1) e) are applicable not only to credit institutions but also to investment firms. In addition, some provisions applicable to banks and thereby falling within the scope of the powers of supervision of the ECB have inspired rules applicable to other financial institutions.

The judgment of the General Court is excessively long in light of the clear wording of Article 88 (1) e) of CRD IV. The long developments on the alleged ratio legis of Article 13 could have been avoided. For reasons of clarity and simplicity, the judgment could have been limited to two statements, one on the scope of Article 88, paragraph 1, under e) of CRD IV and one on the possibility for the home member State to set requirements going beyond those of the Directive.

However, the stress put by the General Court on the good governance of credit institutions and investment firms shows that those new rules must be considered as of the utmost importance for credit institutions. It can thereby be deducted that violations of those rules could justify severe administrative sanctions and ever result in civil liability for banks and investment firms.