As part of its prudential supervision of credit institutions under the Single Supervisory Mechanism ("SSM"), the European Central Bank ("ECB") is empowered to adopt enforcement measures and to impose pecuniary penalties on credit institutions. The sanctions act as a deterrent to the banking sector to avoid the intentional or negligent breach of EU law or ECB decisions and regulations. The ECB can impose penalties up to a maximum of twice the amount of profits gained or losses avoided due to the breach, or alternatively up to 10% of the credit institution's total annual turnover from the preceding business year. The sanctions must be proportionate and, in assessing such proportionality, the severity of the infringement and any aggravating or mitigating factors will be considered.
General Court Judgments
On 8 July 2020, the General Court of the EU (the "Court") issued a press release confirming that the first four of its decisions have been delivered regarding the imposition of penalties by the ECB as part of its prudential supervision of credit institutions. The Court's decisions clarify the interpretation of the rules surrounding the publication and anonymisation of penalties, as well as the means for their calculation and justification. Parts of the ECB's decisions in three of the judgments were annulled due to insufficient reasons being given by the ECB for their imposition, thus thwarting their purpose as "effective, proportionate and dissuasive" sanctions.
VQ v ECB (T-203/18)
VQ challenged the decision of the ECB that it had breached Article 77(a) of the Capital Requirements Regulation (Regulation (EU) 575/2013) by repurchasing its own shares without the prior permission from the relevant competent authorities. Pursuant to Article 18(1) of the SSM Regulation (Council Regulation (EU) No 1024/2013), the ECB imposed an administrative penalty of ?1,600,000 on VQ (equivalent to 0.03% of its turnover). VQ argued that it had not committed an infringement and challenged the proportionality of imposing the pecuniary penalty, the rules surrounding the publication of the penalty on the ECB website and also the proportionality of the publication.
The Court rejected all of VQ's arguments. With regard to the proportionality of imposing a pecuniary penalty, it was held that the ECB had complied with the principle of proportionality on the basis that there was no doubt as to the interpretation of Article 77(a).
On the issue of the publication of the penalty on the ECB website, the Court had regard to the wording of Article 132(1) of the SSM Framework Regulation (Regulation (EU) No 468/2014), which allows for the ECB to anonymise or delay the publication of penalties in circumstances where "disproportionate damage" would be caused to the supervised entity by such publication. The Court found that Article 132(1) should be interpreted as establishing, in principle, that all decisions where an administrative pecuniary penalty is imposed are to be published, and that such publication shall include the identity of the defaulting entity, unless the ECB deems otherwise.
The Court further found that "disproportionate damage" should be examined solely on the consequences of a lack of anonymity rather than taking into account the gravity of the breach committed. VQ failed to show that it would suffer "disproportionate damage" by the publication of the penalty.
Crédit Agricole v ECB (T-576/18); Crédit Agricole Corporate and Investment Bank v ECB (T-577/18); and CA Consumer Finance v ECB (T-578/18)
The Crédit Agricole group brought actions seeking the annulment of the ECB's decisions against three of its members. Each of the institutions were found to have breached Article 26(3) of the Capital Requirements Regulation (Regulation (EU) 575/2013) by negligently classifying certain instruments as Common Equity Tier 1 ("CET 1") instruments without authorisation from competent authorities. The ECB imposed penalties of ?4,300,000 on Crédit Agricole SA (0.0015% of the group's turnover), ?300,000 on Crédit Agricole Corporate and Investment Bank (0.001% of the group's turnover) and ?200,000 on CA Consumer Finance.
The Court held that there had been a breach by the applicants in each of the cases. The Court found that Article 26(3) must be interpreted as requiring a credit institution to obtain authorisation before classifying capital instruments as CET 1 instruments and, as there is no ambiguity in the sequence of the process, that each of the applicants should have been able to comprehend the provision. Consequently, the ECB was justified in finding that the applicants were negligent in this regard.
As regards the penalties imposed on the applicants, the Court found that the ECB was entitled to impose an administrative pecuniary penalty of up to 10% of the group's total annual turnover and acknowledged that it has a wide discretion in doing so. However, the penalties were annulled on the basis that inadequate reasons were given for those decisions. Under Article 18(1) of the SSM Regulation, the ECB holds a significant margin of discretion in determining the amount of the pecuniary penalty to be imposed, and as a result, there is a fundamental importance in safeguarding procedural rights in such administrative procedures. The Court found that the ECB had not provided sufficient information concerning the calculation of the penalties and instead had highlighted a number of factors that were considered, namely, the seriousness of the breach, the duration, the seriousness of the failure of which the applicant was accused of and an assurance that attenuating circumstances were taken into account. Additionally, the Court noted that the failure by the ECB to mention the size of the credit institution concerned prevented the Court from assessing whether the penalties imposed were effective, proportionate and dissuasive under Article 18(3) and ultimately led to their annulment.
The above Court decisions highlight first, that where a sanction is imposed by the ECB, details of the penalties imposed and the identity of the defaulting entity will be published on the ECB website save for circumstances where that entity can clearly establish that it would suffer "disproportionate damage" as a consequence thereof.
It remains clear that the ECB is afforded a wide discretion when imposing administrative pecuniary penalties in carrying out their supervision of credit institutions, as demonstrated in the VQ decision where the Court did not annul a penalty imposed by the ECB. However, the decisions relating to the Crédit Agricole group's institutions highlight the importance of providing a clear explanation and justification for any penalties imposed so they may be, as required by Article 18(3) of the SSM Regulation, "effective, proportionate and dissuasive".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.