This Client Alert outlines the European Court of Justice’s recent judgments on three 2017 Single Resolution Board (SRB) contribution decisions and assesses the impact these and other judgments may have on the SRB’s future approach to determining Single Resolution Fund contributions.

Background

Three EU financial institutions, Landesbank Baden-Württemberg (Germany), Hypo Vorarlberg Bank AG (Austria) and Portigon AG (Germany) (together the Claimants), each brought an action for annulment of the SRB’s 2017 decision on the calculation of ex ante contributions to the Single Resolution Fund (SRF). On September 23, 2020, the General Court (the Court), a constituent court of the European Court of Justice (ECJ), annulled the SRB’s 2017 decision on ex ante contributions of the three Claimants¹. This Client Alert assesses the impact of the 2020 cases and the outlook. 

The SRF is funded by contributions from credit institutions and certain investment firms in the 19 participating member states within the Banking Union. It aims to ensure the efficient application of resolution tools and the exercise of resolution powers conferred on the SRB by the Single Resolution Mechanism (SRM) Regulation. The SRB, which is responsible for restructuring failing credit institutions and certain investment firms, annually sets the ex ante contribution for approximately 3,500 financial institutions and collects these contributions via the national resolution authorities (NRAs) participating in the Banking Union.

The decision

In three judgments dated September 23, 2020, the Court held that:

1. The Claimants had standing: Whilst the SRB’s decisions on the calculation of the ex ante contributions to the SRF are addressed to NRAs, those decisions are of direct and individual concern to the institutions owing the contributions. The Claimants therefore had standing to bring an action for annulment of the SRB’s decision, in line with Iccrea Banca v Banca d'Italia (C-414/18).
2. The SRB’s decision lacked proper authentication: The SRB did not sign or otherwise authenticate the document containing the amount of ex ante contributions. Whilst this document constituted an essential component of the SRB’s written decision on costs, which was properly authenticated, it was nonetheless a distinct document that should have been authenticated separately. Therefore, the SRB’s decision was not adequately authenticated.
3. The SRB’s decision lacked an adequate statement of reasons: The statement of reasons on the amount to be paid by each Claimant did not contain calculation methodology factors that would be specific to the other 3,500 institutions, despite the calculation of Claimants’ contributions involving (a) a pro-rata calculation of the amount of liabilities with respect to the total liabilities (in each case excluding own funds and covered deposits) of all other institutions as well as (b) an assessment of the Claimants’ risk profiles compared to the risk profiles of other institutions. The Court therefore determined that the calculations of the Claimants’ contributions, to the extent these were based on other institutions’ data, were ‘inherently opaque’. The data provided by the SRB did not enable the Claimants to assess whether their required contribution was calculated correctly, thus depriving them of the ability to formulate grounds on which to bring a legal challenge. Whilst the other institutions’ data used for the calculations are confidential, the Court held that the duty to preserve business secrets cannot be interpreted so widely that the obligation to state reasons does not apply.
4. Delegated Regulation 2015/63 is partially illegal: In relation to Landesbank Baden-Württemberg’s case, the Court stated that the SRB’s infringement of the obligation to state reasons stemmed from the illegal nature of Articles 4-7 and 9 of the Delegated Regulation 2015/63, which supplements the Bank Recovery and Resolution Directive regarding ex ante contributions to financial resolution arrangements. As the SRB cannot adopt a new decision without infringing its duty to adequately state reasons until Delegated Regulation 2015/63 is amended, the Court will maintain the effects of the SRB’s decision in relation to Landesbank Baden-Württemberg for six months after the final judgment.

The SRB’s response

On the day the judgments were delivered, the SRB issued a press release stating that it ‘takes note’ of the Court’s judgments and stating that it will “carefully consider” the content of the judgments in order to determine the next steps in cooperation with the European Commission and the relevant NRAs.

If the SRB wishes to bring an appeal, this may be brought before the ECJ within two months and 10 days of the notification of the decision, and must be limited to points of law only.

The broader context

The SRB started collecting ex ante contributions in 2016 and has had numerous cases brought against it since. This is largely due to the novelty of the exercise, the large amount of participating institutions, the technical nature of the calculations, and the high confidentiality of the data involved.

Whilst the cases indicate that the SRB’s calculation methodologies require updating, they also show that the Court is willing to step in and guarantee the protection of the institutions involved. For example, the Court’s rulings on the SRB’s failure to authenticate the calculation documents, as well as its lack of an adequate statement of reasons, reflected those in Banco Cooperativo Español v SRB (T-323/16), Hypo Vorarlberg Bank v SRB (T-377/16) and Portigon v SRB (T-365/16), all delivered in 2019. In each case, the Court annulled the SRB’s decision on the applicants’ ex ante contributions for 2016. Taken together, the 2019 and 2020 judgments of the Court do much to clarify the constraints on the SRB’s contribution decision-making process.

The Court further clarified that the SRB does not have a margin of discretion similar to that of the European Commission (the Commission) when setting fines, but must use objective calculations when determining the amount of contributions, especially as there is no deterrent aspect involved. In addition, the Court’s reasoning show that institutions should be able to determine whether contributions are excessive or have been incorrectly calculated so as to be afforded adequate legal protection.

Lastly, the Court disagreed with the Commission on the fact that the calculations laid down in Articles 4-7 and 9 of the Commission Delegated Regulation 2015/63 are imposed by Regulation No 806/2014 (SRM Regulation) or Directive 2014/59 (BRRD) and reiterated the Commission’s previous assertion that an institution’s risk profile may be assessed on the basis of its own data rather than by comparison to other institutions. Whilst this ruling only applies to the affected party, the Commission may nonetheless be required to amend the relevant provisions to remove the illegality.

Outlook

The Court’s renewed confirmation of the issues underlying the SRB’s calculation methodologies foreshadow the outcome of pending cases brought on largely identical grounds, such as Portigon’s application for annulment of the SRF’s 2018 contribution decision (T-413/18). However, it is not yet clear what the outcome will be of cases brought on wider grounds, such as Portigon’s application for the annulment of the SRB’s 2019 contribution decision (T-481/19), in which it asserted that the SRB “was wrong to make [Portigon] subject to an obligation to pay a contribution” per se, rather than solely disputing the underlying methodology or reasoning.

The Court is unlikely to issue a judgment on the latter case prior to 2022. Given that the 3,500 institutions will not be required to contribute to the SRF beyond 2023, such a judgment may therefore be of little practical relevance. This is because the Court’s decisions only apply to the relevant applicants rather than to all firms to which the SRB applied identical calculation methodologies. Additionally, the number of applicants are generally limited as the annulment of contributions must be sought within two months. The judgments therefore mainly have a proactive effect on a wide range of firms because the SRB has to change its general approach based on new legal provisions that will have to replace the (partially) illegal rules.

On the basis of the recent judgments, however, it seems probable that the SRB will amend some but not all of its approach to its calculation methodology to the extent it reflects that which was used in regard to the Claimants. This will not be straightforward given the complex and technical nature of the calculations, as well as the many parties involved. However, doing so would grant the SRB a stronger basis for its future calculation methodologies and halt the number of annulment actions being brought, or at the very least, allow the SRB to defend its actions with greater success. Affected firms may wish to closely follow the SRB’s reaction to recent and pending cases and, depending on the nature of these developments, carefully assess their options together with their legal advisers.

The lawyers of our financial institutions regulatory team are assisting a number of banks and other regulated firms on regulatory matters. If you would like to discuss any of the items mentioned, or how they may affect your business more generally, please contact any of our key contacts or the wider team of our financial institutions regulatory team.

1. The full judgments can be accessed here:
   • Landesbank Baden-Württemberg v SRB (T 411/17)
   • Hypo Vorarlberg Bank AG v SRB (T 414/17)
   • Portigon AG v SRB (T 420/17)
   NB: At the time of writing (September 29, 2020), the latter two judgments are only available in German and French. It is expected that they will become available in English and other languages shortly. After opening the link, the language can be changed using a drop-down box in the top left-hand corner of the screen. ↩