Last month, the joint Board of Appeal of the European Supervisory Authorities (the Appeal Board) published its first decision allowing an appeal brought by an Estonian company, SV Capital OU (“the customer”) against the European Banking Authority (EBA). The case arose following litigation brought by a customer against its bank, from the EBA’s decision not to investigate the alleged failure of national competent authorities to take regulatory action, at the customer’s request. The case is of interest because it effectively holds that the assessment of suitability of the management of a credit institution does not simply apply to management at the level of the credit institution, but can also apply to key function holders who have a crucial role in the day-to-day management of its business.

Factual background

Following proceedings taken by the customer against the Estonian branch of Nordea Bank Finland plc in respect of the operation of a current account, the customer then asked the Estonian Financial Supervision Authority (EFSA) to take steps to remove two managers of the branch, asserting that the domestic court had found that they had not given truthful evidence to the court. The EFSA responded that the question of whether the managers of the branch were fit and proper was a matter for the bank’s home state, Finland. When approached in its turn, the Finnish regulator declined to take action on the basis that it had been informed that the customer’s claims were untrue.

The customer asked the EBA to investigate the failure of the Estonian and Finnish authorities to take action. The EBA responded that the assessment of the suitability of the members of the management body in the management applied to management at the level of the credit institution – but not at branch level. Accordingly there had been no breach of EU law by the competent authorities, and the EBA had no power to investigate.

The customer challenged that decision before the Appeal Board, alleging a failure by the EBA to act, in breach of the EBA Regulation, the Financial Conglomerates Directive, the Payment Services Directive and the Directive relating to the business of credit institutions.

The decision

Exercise of discretion not in issue

The Appeal Board was at pains to stress that the EBA’s power to investigate is discretionary, and that this appeal was concerned not with the discretionary element of that power, but whether the conditions for the exercise of the power had been triggered – whether the complaint alleged a breach or non-application of EU law within the scope of article 17 of the EBA Regulation.

The decision also refers to the Internal Processing Rules which govern the EBA’s procedures and to the non-exhaustive factors the EBA will take into account in deciding whether to investigate an alleged breach or non-application of EU law.

In favour of investigation:

  • The alleged breach undermines the foundations of the rule of law (for example, systemic infringements, breaches of human rights or fundamental freedoms);
  • The alleged breach concerns a repeated infringement (for example, a pattern of complaints indicates systematic incorrect application);
  • The alleged breach may have a significant, direct impact on EBA’s objectives concerning:
    • functioning of the internal market;
    • integrity, transparency, efficiency and orderly functioning of financial markets;
    • preventing regulatory arbitrage and promoting equal conditions of competition; and
    • enhancing customer protection.

Against investigation:

  • The request is more suitable to be dealt with by another person or body, such as inter alia,the European Commission, another European Supervisory Authority, a national competent authority, a national complaints scheme or a court;
  • The request is more suitable to be dealt by other EBA’s means (peer review, mediation, etc.);
  • The request appears frivolous or vexatious.

Where appropriate, the rules provide that the EBA’s Chairperson should inform the complainant of any possible alternative forms of redress, such as recourse to national courts, the European Ombudsman, a national ombudsman or any other national or international complaints procedure.

Whether the complaint was admissible

The Appeal Board considered whether the suitability of a manager of a significant branch of a bank (whether he is fit and proper) is a matter which falls within the scope of EU law, or was merely a matter to be dealt with by national law.

Interpreting articles 11 and 22 of Directive No. 2006/48/EC (relating to the taking up and pursuit of the business of credit institutions) consistently with the EBA Guidelines on the assessment of the suitability of members of the management body and key function holders, the Appeal Board concluded that the “fit and proper” requirement is not restricted to the persons who direct the business of the credit institution, but extends to the suitability of “key function holders”, which may include heads of significant business lines or EEA branches. The Guidelines go beyond the persons who effectively direct the business of a credit institution (in article 11) and, pursuant to article 22, extend to all members of the management body and to those key function holders who have a crucial role in the day-to-day management of its business. The alleged facts raised in the complaint were therefore capable of amounting to a breach or non-application of EU law, and thus were admissible and within the EBA’s powers of investigation.

Other points

The Appeal Board rejected the remaining appeal grounds based on provisions in the EBA Directive (which it held did not provide a basis for an investigation), and those in the Financial Conglomerates Directive and the Payment Services Directive (which did not take matters further than the Directive relating to the business of credit institutions). The Appeal Board also rejected criticisms of the way in which the EBA dealt with the complaint.

The case was remitted to the EBA to adopt the appropriate decision in accordance with the Appeal Board’s findings. Although the customer claimed an order for costs, no order as to costs was made.


Implications for process

It is interesting that the first challenge to the exercise of the ESA’s powers should have come from a consumer, who was plainly frustrated by what it may have perceived as buck-passing between relevant authorities – notwithstanding the existence of a Multilateral Cooperation and Coordination Agreement for the Nordea Group Supervisory College – and, overall, a failure to act on its complaint.

The Appeal Board stresses that only the Court of Justice of the EU can give an authoritative interpretation of those areas where Union law defines clear and unconditional obligations. It also recognises that as relatively small bodies, the ESAs are not in a position to investigate every admissible complaint made. The Appeal Board goes on to give the ESAs a very clear steer that if in future they should choose not to investigate under article 17 even if the alleged breach is a breach of Union law, they may – and perhaps should – frame their decisions accordingly.

It seems unlikely that a similar complaint would necessarily be handled very differently in the future: the host state would almost certainly refer the matter back to the home state, which might or might not choose to investigate the matter (it is not clear on what evidence the home state authority concluded that the customer’s claims were untrue), and a referral to the EBA could well produce a decision not to investigate, in the exercise of the EBA’s broad discretion. Whilst the consumer’s ultimate prospects of success seem fairly remote, given the discretionary nature of the powers of both the national competent authorities and of the EBA, the case has been a useful exploration of what the Appeal Board describes as a “new process”.

Wider implications

In drafting the legislative framework for the new Senior Persons regime recommended by the Parliamentary Commission on Banking Standards, HM Treasury will no doubt be at pains to ensure that the proposals are aligned with the EBA Guidelines on the assessment of the suitability of members of the management body and key function holders, not least since some part of the complexity in the existing APER regime, which the Commission criticised, has been the result of having to bolt European requirements onto the UK regime.

Going forward, it would not be unreasonable to expect to see greater regulatory focus across the EU on the ongoing suitability of key function holders, including heads of significant business lines, EEA branches, third country subsidiaries, and support and internal control functions.