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Financial Services Law
Abstract
The chapter focuses on recent developments in the legislation and case-law in the field of financial services law. Section 2 provides an overview of selected acts of EEA financial services legislation and recent reform proposals thereto. Section 3 analyses three landmark decisions of the EFTA Court that addressed the legal consequences of the world financial crises. The last section then investigates the practice of ESA in the financial services sector.
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The Icelandic internet bank Icesave went bankrupt in late 2008. The insufficient Icelandic deposit guarantee scheme (Tryggingasjóður) did not resist the Icelandic financial meltdown and failed to compensate British and Dutch depositors the guaranteed sum of €20,887 as settled in Directive 94/19/EC, which according to the European Economic Area Agreement (EEA) regulates the Icelandic financial sector. The British and Dutch deposit schemes paid out guarantees to their national Icesave depositors on behalf of the Icelandic scheme. Subsequently, an agreement was reached between Iceland, the United Kingdom and the Netherlands. As part of the arrangement, the Icelandic government guaranteed the reimbursement of the British and Dutch bridging loan. The Icelandic referendum of 6 February 2010 rejected the agreement and the Icesave Act, which torpedoed the Icesave reimbursement plan. The EFTA Surveillance Authority (ESA) issued a formal reprimand to Iceland. However, this has not been followed by any infringement proceedings as provided for by the EEA agreement.
The author's position is that the ESA position results from a confusion of regulatory commitments with pecuniary liabilities. The key point is whether the Icelandic guarantee is in accordance with EU Directive 94/19/EC. The Directive requires the legislator to act. It is not a directive to force the government to pay (see Directive 94/19/EC Article 3.1.). This provision contributes to the implementation of the ban on Member States against guarantee schemes that distort competition. The schemes are self-financing and fully paid by the financial institutions. In the case of insufficient coverage, all depositors are subject to an equal pro rata reduction in compensation, as the scheme guarantee of full payment of the deposit guarantee sum of €20,887 is an objective to be reached within a reasonable time and not a legal right from day one. Government aid to top up the fund is prohibited, whether it is the intention or consequence. The Icelandic government cannot cover the scheme’s insufficiency by granting money to the fund. As the EU enjoys exclusive autonomy over its external relations, Member States cannot bilaterally arrange for such a solution. Thus, depositors not fully reimbursed are stuck with Icelandic bankruptcy proceedings. Claims are considered by the administrators in accordance with the Icelandic Bankruptcy Act on outstanding debts not paid out by the deposit guarantee scheme.
This article explores the limitations of the provision of deposit insurance in the European Union and assesses the revisions to the Directive on deposit guarantee schemes, as well as the need for further reform in the light of the financial crisis. The authors endorse a move towards a more effective European-wide institutional arrangement in line with a move towards a greater degree of pan-European supervision. The design of this aspect of the safety net should be consistent with the needs of a single market in financial services and aligned with other initiatives in the field of financial crisis management and resolution.
“Homogeneity is the magic formula of the EEA Agreement. EU and EEA law, two separate legal orders, are essentially identical in substance and they must develop in a homogeneous way. The EEA single market can only function undistortedly if there is a level playing field for operators. Competition must be led by economic, not by regulatory advantage. On a judicial level, ensuring homogeneity is a challenging task to be fulfilled by the two EEA courts, the ECJ and the EFTA Court. The EFTA Court’s task was not facilitated by those passages in Opinion 1/91 which doubted the possibility to guarantee judicial homogeneity. But once it became clear that the EFTA Court was serious about this, its large sister court changed gear and opened what over the years became a fruitful dialogue. Three aspects of homogeneity have been carved out: Substantive, effect-related and—only recently—procedural. Twenty years after signing the EEA Agreement there can be no doubt that substantive homogeneity has been preserved. Homogeneity to a large extent has also been safeguarded with regard to effect, primacy and state liability. The potential of the new concept of procedural homogeneity has yet to be defined.”
Key points: - When the Cyprus rescue was announced, the initial idea was to have depositors contribute to the banks' rescue. This did not happen but depositors across Europe became concerned. The question arose whether small deposits at EU banks are safe. - This article examines the safety of deposits of natural persons and small and medium-sized enterprises (SMEs) under four legal texts: three documents adopted in the context of 'banking union' and a fourth text on state aid to the banking sector. These documents contain provisions on the so-called 'bail-in': contributions by a bank's creditors towards a bank's rescue ahead of public assistance. - The legal acts concerned are the latest available on the Single Resolution Mechanism, the third element of 'banking union', the Bank Recovery & Resolution Directive, the Eurogroup Agreement on direct bank recapitalization from the European Stability Mechanism, and the Commission's 2013 Banking Communication. - On the basis of the latest texts available at end-2013, it is concluded that deposits covered by deposit insurance will be free from 'bail-in': natural persons and most (in the future: all) SMEs will see their deposits up to €100,000 legally secured.
Iceland was hit hard by the financial crisis in 2008, especially by the spill-over effects of its banking failure when all of its three major banks collapsed. This article examines the Icelandic regulatory response to the crisis. The Icelandic case is special as the banks were not only too big to fail but also too big to rescue. Thus, legislation dealt with the failure of the banks and the aftermath of the crisis. First, the most important legislation was the Emergency Act that provided the Financial Supervisory Authority (FME) with emergency authority over banks in danger of becoming insolvent. The role of banks is integral to any economy. In order to ensure normal banking services and the safety of deposits in Iceland, three new banks fully owned by the Icelandic government were established on the basis of the Emergency Act. The most controversial provision of the Emergency Act granted depositors' claims priority over other unsecured claims in the winding up of the collapsed banks. Now the EFTA Surveillance Authority has concluded that this did not constitute a breach of the EEA Agreement. The Emergency Act made necessary amendments to the Act on Financial Undertakings concerning the reorganisation and winding up of financial undertakings. Second, a Special Investigation Commission was established by law. To enable a search for the truth, the legislation was far-reaching. The primary role of the Commission was to seek the truth. The report of the Commission discloses information that otherwise would not have been disclosed because of bank secrecy laws and sheds a unique light on the practices of the banks. Third, it was considered important that the law would be enforced by all necessary means. Thus, the temporary position of Special Prosecutor was established by law. Fourth, cross-border banking in the EU/EEA is examined in the light of the so-called Icesave dispute between Iceland on the one hand and the UK and the Netherlands on the other. It sheds a light on some of the major flaws of cross-border banking in the EU/EEA already known and criticised long before the crisis. When the Icelandic banks collapsed, the government of Iceland declared that all deposits in domestic banks and branches were guaranteed but not those in foreign branches. This gave rise to the question of whether Iceland could be held liable on the basis of the EU Deposit Guarantee Directive or because of discrimination of depositors based on nationality. In any case, the financial crisis has shown that there is a gap between law and reality. The conclusion of this article is that it is questionable whether the potential economic benefits of full integration in the field of cross-border banking outweigh the dangers and risks that come with it. If not, the price of full integration may be too high.
More than ten years have passed since the European Commission adopted Directive 94/19/EC on deposit guarantee schemes. The Directive laid the foundations for general harmonisation of deposit insurance across the European Union (EU) Member States (MSs), requiring them to legally set up deposit guarantee schemes by a specified deadline. Based on minimum harmonisation, the Directive left it to MSs to develop their own deposit insurance systems in terms of, for example, definition of eligible deposits, level of cover, types of funding mechanism, and calculation of members’ contributions. This autonomy has resulted in quite divergent evolution of deposit guarantee schemes and gives rise to a series of possible problems, which were the subject of the European Commission's review of the Directive in 2006. This paper overviews the current state of deposit insurance across the EU, highlights the main controversial issues that cause disparities in the implementation of deposit insurance between MSs (eg the definition of eligible deposits, the level of cover applied, the implementation of topping-up arrangements, the types of funding mechanism), and discusses the pros and cons of further harmonisation.Journal of Banking Regulation (2008) 9, 82–101. doi:10.1057/jbr.2008.2
The Icesave Saga: Iceland wins the battle before the EFTA Court
- Me Méndez-Pinedo