What is dead may never die…
In spring 2021 Advocate General Bobek delivered his opinion in the case of Fédération bancaire française v Autorité de contrôle prudentiel et de résolution, opening with a line from the popular show Game of Thrones. Referencing a ritual in the name of the Iron Islands’ deity that reinforces the idea that once you have experienced death, there is nothing to be feared, AG Bobek analyzed the legal nature of EU’s soft law and whether something that has never been alive (or in other words, legally binding) can be declared as invalid by the Court.
The case in question attracted a lot of attention. Apart from the Game of Thrones’ reference, it was also illustrated as an opportunity for the wind of change to turn into a perfect storm. While the wind of change represents the notion that many legal systems are becoming more and more receptive to a judicial review of soft law instruments, turning into a perfect storm served as a metaphor for the CJEU revisiting its traditional approach regarding reviewability of soft law.
… but rises again stronger and harder: The use of soft law instruments in the financial sector.
As an aftereffect of the 2008 financial crisis, institutions on the European soil started to rely on soft law instruments. This doesn’t come as a surprise taking into account that soft law is generally a preferred instrument in times of crisis due to its flexibility in adapting to changes of markets’ conditions. For example, soft law was an immediate go-to toolkit when dealing with the Covid-19 pandemic at the EU level, especially in the areas of competition and state aid.
The umbrella term soft law covers a wide range of instruments of divergent nature and functions. Therefore, it is not an easy task to define it within a single formula. We may describe it as instruments that are not legally binding or whose binding force is somewhat weaker than that of traditional legal instruments, such as guidelines, recommendations, codes of conduct and others.
The value of soft law instruments can be viewed through the lens of international financial law. In contrast to international trade and monetary matters where coordination is directed through formal organizations, financial law mainly derives from inter-agency institutions. 2020 research by the European Network on Soft Law Research (SoLaR) has shown that soft law gained popularity within the financial sector due to its smooth process of adoption, flexibility, and the ability to deal with sensitive issues. Consequently, it has been highlighted that soft law has been hardening out over time.
Background & legal issues
The story dates back to 2017 when the European Banking Authority (EBA) issued Guidelines on product oversight and governance arrangements for retail banking products to address particular risks of misbehavior of financial institutions that can give rise to consumer detriment and jeopardize the integrity of the financial structure. The French authority for prudential supervision and resolution complied with these Guidelines and made them applicable to all financial institutions within its supervisory powers. However, the French Banking Federation submitted an application seeking the annulment of the Authority’s notice before the referring court claiming that EBA didn’t have the power to issue the Guidelines in the first place.
In other words, EBA issued a soft law instrument, and the French authority agreed to comply with it and make it binding for financial institutions under its supervision. The FBF decided to fight off the Authority’s notice by going after the primary source, namely the EBA’s guidelines. To cut a long story short, we may lay down three key questions: (1) Did EBA by adopting these Guidelines go beyond its powers prescribed under Regulation No. 1093/2010?; (2) Is the Court able to declare a non-binding measure invalid in accordance with Article 263 TFEU?; and last but not least, (3) whether national courts have the duty to refer questions regarding the validity of non-binding EU measures in accordance with Article 267 TFEU?
Before moving to other legal issues and the AG’s opinion, we should clarify Articles 263 and 267 TFEU. Article 263 TFEU makes it possible to take action before the Court and challenge the validity of EU acts. It states that the Court can review the validity of EU legislative acts, acts of the European Commission, the Council, and of the European Central Bank other than recommendations and opinions. Further, the Court can also review the validity of acts of EU bodies, agencies or offices intended to produce legal effects. In regard to this particular dispute, the Court had to answer whether a non-binding instrument could fit into the scope of Article 263. Article 267 TFEU provides the mechanism for preliminary rulings by the Court to clarify EU law and provide guidance on the main objectives and implementation of EU legislation. Within the EU naturally exists a variety of domestic laws and legal and cultural environments in which EU law, as a whole, needs to function. Member States also possess a certain degree of discretion when it comes to implementing EU law. Since there are 28 Member States, the same legal act could be interpreted in divergent ways. The purpose of the mechanism prescribed by Article 267 is to provide uniform interpretation and application of EU legislation across all Member States.
If we take a look in the past, we may see that the Court of Justice traditionally rejected the reviewability of soft law in accordance with Article 263 TFEU. The interesting opinion provided by AG Bobek referenced three past cases that might cause a trilemma for the Court, such as Grimaldi, Foto Frost, and Belgium v Commission. For example, the 1989 ruling in the Grimaldi case produced the so-called Grimaldi obligation as a duty of national courts to take EU’s soft law into account when deciding cases. On the other hand, the Court held in the 2016 case of Belgium v Commission that Belgium cannot challenge a Commission’s recommendation even though the document was so detailed that it couldn’t be viewed as a simple invitation to act in a particular manner.
Advocate General’s Opinion: key takeaways
The analysis started with the examination of the Guidelines’ legal nature and the issue of them being a non-binding measure. The main piece of EU legislation in the light of this dispute is Regulation No. 1093/2010 that established the European Banking Authority and further prescribes in Article 16 that the EBA shall issue guidelines and recommendations addressed to competent authorities or financial institutions that shall make every effort to comply with them. Taking into account the wording used in the Guidelines and the lack of obligation to comply with them, AG Bobek concluded that the Guidelines are a genuine soft law instrument.
Advocate General proceeded then to the question of whether the EBA exceeded its competences under the above-mentioned Regulation, namely the issue of the 2016 Guidelines fitting roughly within the Regulation. He provided a thorough explanation of the difference between product and corporate governance by laying down an analogous example of the narrative in the light of the car industry. To sum it up, the disputed Guidelines do not fall within the scope of the Regulation as a whole as he concluded that EBA has exceeded its powers in adopting them.
A thought-provoking part of the Opinion can be seen in paragraphs 83-94 in which he discussed the perils of agencies issuing soft law instruments with limited judicial control. First, he pointed out that while excessive risk may be recognized as being essentially dangerous, every business decision bears a risk. Thus, such a notion cannot serve as a justification for institutions to act beyond their competences. Furthermore, he pointed out that allowing institutions to issue soft law instruments with limited judicial control would only encourage a further expansion of the so-called crypto legislation in the form of soft law, bypassing the ordinary legislative procedure. The analysis ended with a conclusion that it is important to make soft law instruments adopted by EU agencies subject to normal judicial review.
Finally, AG Bobek tackled the interplay between Articles 263 and 267 TFEU, and the concern of the referring court regarding the appearance of a ‘TWD scenario’. The ‘TWD scenario’ illustrates a situation where an applicant, who could have submitted an action for annulment of an EU act before the Court but failed to do so, is precluded from challenging the validity of a national measure implementing the same legal act before the national court.
Crossing the finish line: the judgment of the Court of Justice
The Court began with an examination of the 2016 Guidelines’ legal nature to conclude whether they could be challenged in an annulment procedure. The Court held that binding effects have to be considered in the light of the content, context, effects and issuing authority, siding with its approach in Belgium v Commission. The Court stated that the Guidelines don’t have any binding effects and therefore, they cannot be challenged under Article 263 TFEU.
Secondly, the Court held that the preliminary ruling mechanism under Article 267 TFEU can be triggered by a non-binding legal instrument. As for the validity of Guidelines, the Court stressed out the potential power of guidelines and recommendations assessing their validity from a more abstract point of view and taking into account the ultimate objective of EBA’s powers in the context of producing soft law instruments. Hence, the Court indirectly assessed the Advocate General’s distinction of product versus corporate governance, yet with a different outcome.
After examining Article 16 of the Regulation as a procedural legal basis and the Guidelines’ ultimate main purpose to ensure a consistent application of EU law, contribute to consumer welfare and risk management by financial institutions, the Court concluded that EBA did not exceed its competences and that the Guidelines are accordingly valid.
Sources:
1. Books/Journal Articles/Publications:
Avbelj et al (2020), ‘EU Financial Regulation Soft Law in the Member States: Finland, France, Germany, Italy, the Netherlands, Slovenia and UK’, SoLaR.
Chamon, M. & de Arriba-Sellier, N. (2021) ‘FBF: On the Justiciablity of Soft Law and Broadening the Discretion of EU Agencies’, European Constitutional Law Review 18(2), pp. 286-314.
Eliantonio, M. (2021) ‘Judicial Review of Soft Law before the European and National Courts- A Wind of Change Blowing from the Member States’, in: Eliantonio, M. et al (eds), ‘EU Soft Law in the Member States Theoretical Findings and Empirical Evidence’, Hart Publishing.
Eliantonio, M. & Stefan, O. (2021), ‘The Elusive Legitimacy of EU Soft Law: An Analysis of Consultation and Participation in the Process of Adopting Covid-19 Soft Law in the EU’, European Journal of Risk Regulation 12 (1), pp. 159-175.
2. Case Law:
Fédération bancaire française v Autorité de contrôle prudentiel et de résolution (2021) C-911/19.
Foto-Frost v Hauptzollamt Lübeck-Ost (1987) C-314/85.
Kingdom of Belgium v European Commission (2916) C-270/15 P.
Opinion of Advocate General Bobek delivered on 15 April 2021 (2021) C-911/19.
Salvatore Grimaldi v Fonds
TWD Textilwerke Deggendort GmbH v Bundesrepublik Deutschland (1994) C-188/92.
3. Legislation/Legal Commentary:
Consolidated version of the Treaty on the Functioning of the European Union (2007) OJ C 115/47.
Guidelines on product oversight and governance arrangements for retail banking products (2017) EBA/GL/2015/18.
Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (2010) OJ L 331.