Foreword

EU Directive 2013/36 of the 27th of June 2013, better known as Capital Requirement Directive (CRD IV), dealing with activity of financial institutions and banking supervision, has introduced a new (and to a certain extent, tough) administrative penalty system for banks who violate regulatory rules.

Such Directive was enacted before EU Regulation n. 1024/2013 of the 15th of October 2013, by which banking supervisory powers on all Eurozone banks have been attributed to ECB and a Single Supervisory Mechanism has been set up. This is why in CRD IV National Central Banks are still referred to as Banking Supervisory Authority.

However, there is no doubt that the contents of CRD IV will remain untouched even after the full and unconditional entry of the Single Supervisory Mechanism and the ECB taking the role of Banking Supervisory Authority, which will occur at the beginning of November 2014.

From a juridical perspective, according to art.132.3 of the Treaty on the Functioning of the European Union and art.19.1 and 34.3 of ECB Statute, ECB already has the power to inflict penalties on banks in its role of Monetary Authority. As a consequence, penalties were applied within the limits of this role, i.e., in case of breach of decisions and rules issued by ECB in this specific domain. ECB had also issued procedural rules for the application of such penalties.

After ECB was also conferred the role of EU Banking Supervisory Authority, such power has extended to this new function and the rules set forth by CRD IV represent much more than a sheer framework, as we will show going forward.

Being a CRD IV Directive, it will need enactment in all EU Member States.

Italy started such process through a draft law (Disegno di Legge Delega – DDL) in Parliament, which will be shortly commented afterwards.

CRD IV: Main Features of the New Penalty System

Provided that only National Authorities and not the EU can enact legislation pertaining to criminal penalties, art.65.1 of CRD IV sets forth a very general rule by which administrative penalties must be “effective, proportionate and dissuasive”.

The concept is that the threat of applying such administrative penalties should convince bank directors and employees to leave aside the idea of acting wrongly.

Art.65.2 specifies that penalties will be applicable both to board directors and/or to any other individual responsible for the violation. This implies that a rather detailed system of delegation and apportionment of internal powers will have to be put in place in order to allow the determination of responsibilities in a clear way. Foggy apportionments of internal power would probably cause the extension of the responsibilities of the violation to more than one individual, so that any of them would pay the full penalty.

Articles 66 and 67 provide a list of potential regulatory violations which should be considered in national legislation, and a list of related penalties.

To summarize, violations vary from the conduct of a banking activity without a banking license, unauthorized sales of relevant participations, or providing incomplete or false information to Authorities about liquidity, leverage ratios, and other parameters provided in the Capital Requirement Regulation (Regulation 575/2013), which has introduced Basel III rules in the EU to insufficient corporate governance system in violation of specific requests of the Supervisory Authority.

The list of penalties is also quite long and detailed. Finally, the ECB will have the power to impose the following penalties, of a non-monetary and monetary nature:

  1. Non-Monetary Penalties
  • the withdrawal of the banking license
  • binding orders to companies and/or individuals to immediately stop the violation and not to repeat the violation
  • a declaration which publicly identifies the authors of the violation
  • removal of the author of the violation from his/her position (from Board, from managerial body, or from auditing and control functions)
  • banning of the author of the violation from the European financial system
  • the withdrawal of the right to vote from shareholders who have performed a violation.
  1. Monetary Penalties
  • for individuals, fines up to 5.000.000 Euros (five millions)
  • for banks, fines up to 10% of consolidated turnover calculated on figures of the year before the violation is put in place
  • for individuals and/or banks, fines up to the double of the illicit profit obtained through the violation, if the amount can be determined.

Finally, art.70 provides a list of relevant circumstances which the Regulator should always consider in order to determine the quality and the amount of the penalty.

The European Banking Authority (EBA) will keep the official list of penalties applied in Europe, updated also with the outcome of eventual judicial decisions related to the legitimacy of the penalties.

A View From Italy

As anticipated, a draft law to adapt the Italian legal system to penalty provisions of CRD IV was submitted to Parliament on the 22nd of November 2013 and is still lying there.

At present, such draft law is lying at the Chamber of Deputies (Camera dei Deputati). For details, the text can be found in the Italian Parliament web site as “A.C. 1836”, which means “Atto Cameran. 1836 – Delega al Governo per il recepimento delle direttive europee e l’attuazione di altri atti dell’UE” (Deed of the Chamber number 1836 – Delegation to Government for the reception of European directives and other acts of the EU).

Such Deed was submitted on the 22nd of November 2013 by the previous Government. The original text has undergone some changes after the exam by Parliamentary Commissions. However, a final text has been approved last month and it awaits general Parliamentary discussion (Discussione in Aula).

The new penalty system is fully dealt with at art.3.

The features of CRD IV, as mentioned in the previous paragraph, are all correctly reported.

What has to be underlined is that by the reception of CRD IV, the Italian legislator has taken the stand that both the penalty system contained in the Banking Act of 1993 (Italian Consolidated Banking Act – Law 30th of September 1993 n. 385 – Testo Unico Bancario) and the penalty system of the Italian Consolidated Financial Act (Law 24th of February 1998 n.58 –Testo Unico della Finanza) will have to be changed.

All the new criteria are contained in art.3 of the draft law.

The Parliamentary way of the draft should start this month, but it is unpredictable to foresee when it will end.

Furthermore, the draft is a delegation which only sets forth guidelines and principles, so after the approval by Parliament, the Italian Government will have to draft specific norms which will have to replace the existing ones contained in both the Consolidated Banking and Financial Acts.

The whole process will probably take time, while art.162 of CRD IV states that, with the only exception of rules pertaining to capital reserves, the Directive should have been executed in Member States at the end of last year, 2013.

Finally, Italy has a delay in the directive execution process.

We think that penalty provisions of CRD IV do not have the features of self-executing norms, so the delay might cause only the responsibility of Italy towards the EU, but not the direct application of the directive itself.

However, uncertainty in such delicate matters as applicable penalties do not favor a smooth transition from the “old” to the “new” system, especially where the differences between the two systems are really huge.

In fact, in the past, Bank of Italy had only a small portion of the quality and size of the penalties available to ECB today.

Conclusions

The new administrative penalty system represents a relevant change in the banking business scenario all over Europe.

In Italy, such new system probably represents the main proof of the radical changes which are to be expected in the banking environment after the long economic crisis which has affected the Country.

We can expect that, according to experience, a lot of attention will be devoted as soon as the new provisions enter into in force, most probably around next September or October.