Directive 94/19/EC on deposit-guarantee schemes, which has also been transposed into EEA law, obliges EU and EEA EFTA states to create deposit-guarantee schemes. Deposit-guarantee schemes reimburse a limited amount of deposits to depositors where their bank has failed. The purpose is to protect a part of depositors’ wealth from bank failures, and thus to prevent depositors from making panic withdrawals from their bank with potentially dire economic consequences. In the present case, the EFTA Court was confronted with an action by the EFTA Surveillance Authority against Iceland. The Authority claimed that Iceland had violated the transposed Directive and thus EEA law in the aftermath of its major economic crisis and collapse of the banking sector in 2008, by failing to ensure that British and Dutch depositors using the famous ‘Icesave’ accounts offered by Icelandic banks received the minimum amount of compensation set out in Article 7(1) of the Directive. In a rather surprising decision handed down on Monday this week, the Court interpreted the Directive very narrowly, effectively finding that Iceland had not failed to comply with its obligations under EEA law.
The famous ‘Icesave’ saga should still be quite well-known to most of us; if not, you may want to read the Court’s concise summary of the story in paras 26-54. The central provisions to this case are Article 7 and 10 of the Directive, together with a number of its recitals. Article 7, paragraph 1 of the Directive obliges States to ensure that deposit-guarantee schemes ‘shall stipulate that the aggregate deposits of each depositor must be covered up to ECU 20 000 in the event of deposits’ being unavailable. Paragraph 6 stipulates that depositors must be able to bring an action for his right to compensation against the deposit-guarantee scheme.
The EFTA Surveillance Authority submitted that the Directive imposed an obligation of result on EEA States, which meant they had to set up a deposit-guarantee scheme capable of guaranteeing that the deposits of each depositor were covered up to the amount stated in Article 7 (1) in the event that the deposits were unavailable. Furthermore, this signified that States also had to ensure that verified claims of depositors were paid within the deadline of three months set out in Article 10 (para 76). To this end, the Authority relied on the Court of Justice of the European Union’s case law, in particular the decision in Paul and others.
Iceland responded that such an obligation of result cannot be accepted as inherent in the Directive; in such a case, there would in fact be no remaining discretion for a State to implement the Directive, as in an extreme situation, the State itself would always have to step in to ensure the payment of compensation – at least in cases where the deposit-guarantee scheme failed (para 102).
The second claim brought forward by the Surveillance Authority concerned the alleged preferential treatment given to Icelandic depositors with regard to the activation of the deposit-guarantee scheme, which I will address at the end.
The Court started off by noting the magnitude of the ‘systemic crisis’ experienced in Iceland which raised the question of whether, in such a situation, the defendant could be expected to ensure payment to depositors as foreseen by the Directive (para 117). While directives in general were aimed at achieving a specific result, the exact nature of that result and thus of the obligations imposed on states could differ (paras 120-121). In the Directive, a variety of models of deposit-guarantee schemes were available for a state to choose from, with the competent national authorities being in charge to supervise that the obligations under the Directive were complied with by the respective deposit-guarantee scheme (paras 131-132). However, according to the Court, in line with the Opinion of the Advocate General in Paul and others (para 117 of AG Stix-Hackl’s opinion), the Directive did not ‘exhaustively’ regulate the unavailability of deposits (para 134). States thus had to introduce a deposit-guarantee scheme and ensure its supervision, but not the payment of aggregate deposits ‘in all circumstances’ under the Directive (para 135).
The Court supported its narrow reading of Article 7 by pointing to the new Directive 2009/14 adopted in the EU context which provides a much more stringent wording of the respective provision. Even though this provision was not applicable to the facts of the case at issue, the rewording showed that the EU legislator saw the need to substantially change the legal framework of the old Directive to extend the responsibility of EEA States (paras 140-141). Also, the requirement to give depositors the possibility to bring an action for their claim of compensation against the deposit-guarantee scheme was limited to an obligation to create an ‘effective right to file an action’ (para 143). It did not, however, go as far as addressing the situation where a deposit-guarantee scheme was unable to pay duly qualified claims. According to the EFTA Court, Article 7 did not, therefore, impose any obligation to ensure compensation if a deposit-guarantee scheme was unable to cope with its obligations in the event of a systemic crisis (para 144).
Similarly, in the eyes of the Court, Article 10 of the Directive only contained a ‘procedural obligation’ relating to the three month period for payment (para 146). Again, however, the provision could not be read as containing an obligation for a state to ensure compensation if a deposit-guarantee scheme failed ‘under exceptional circumstances such as in a systemic crisis’ (para 147).
The Court then turned to the general objectives pursued by the Directive. Based on its recitals, the Court concluded that it dealt ‘at least primarily’ with the case of a failure of individual banks and not systemic crises (para 150). Furthermore, it emerged clearly from the recitals that the cost of deposit-guarantee schemes was to be borne in principle by credit institutions and not the States (para 156). As a classic insurance system, the other institutions were typically supposed to bear the financial burden if one institution went bankrupt (para 159). The case of a systemic crisis where this system would no longer work was not, however, addressed at all by the Directive (para 160). Any legal obligation on States to step in in such cases would have had to be expressly set out by EU legislator in the Directive, since it would have had considerable effects on competition and would have had to respect the rules on State aids (paras 164-165). Furthermore, ‘unsound management’ and moral hazard problems should also be reduced as recital 16 of the Directive states (the EFTA Court quoting here Stiglitz, see para 167), which would not be achieved if the state was obliged to step in as the Surveillance Authority’s reading of the Directive would suggest.
A final obstacle to the EFTA Court’s interpretation could have emerged from recital 24 which precludes liability of a State and its competent authorities in respect of depositors ‘if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized’. The Court, however, rejected the consequent argument of the EFTA Surveillance Authority that this recital would support that the Directive contained an obligation of result and states were liable unless they could achieve this result; it insisted instead that the ‘conditions prescribed in this Directive’ were not further defined here (para 173) and the result to be achieved by the Directive had already been found to be limited (para 175). The Court thus concluded that the Directive ‘does not envisage’ that Iceland had itself to ensure payments to depositors of Icesave accounts in the Netherlands and the United Kingdom ‘in a systemic crisis of the magnitude experienced in Iceland’ (para 178). The conclusions reached by the CJEU in Paul and others were also not applicable to the circumstances of the case, as the facts differed in that case insofar as Paul concerned the extent of the liability of German authorities as a result of their negligence in the conduct of supervision of banks rather than the establishment of that liability (para 179).
The second issue the EFTA Court had to deal with was the claim that Iceland discriminated between foreign and domestic account holders. Based on emergency legislation, domestic deposits had been transferred to a newly created “good” bank after the collapse of the Icelandic Landsbanki but before the Icelandic deposit-guarantee scheme was activated – and failed (para 211). The Court found no discrimination between foreign and domestic deposits, as from the moment on when the remaining deposits had become ‘unavailable’ and the Directive kicked in, all the concerned deposits were equally treated, while the domestic deposits had never become ‘unavailable’ in the first place (para 214). Such a transfer of domestic deposits thus did not fall within the scope of the Directive for the Court – ‘whether it leads in general to unequal treatment or not’ (para 216).
This second part perhaps exemplifies what makes this decision sit somewhat uncomfortably as a whole. The Court seems to be cutting up the case in such small fragments that the overall picture gets lost – and as a consequence, a State action that clearly aims at furthering the interests of domestic depositors over foreign ones is very bluntly left outside the scope of the Directive and thus passes muster. This piece-meal approach to interpretation also applies to some extent to the analysis of Articles 7 and 10 of the Directive: Again, one cannot shake the impression that the ‘big picture’ is somewhat lost in the word-by-word reading that the EFTA Court adopts. Fortunately, this concern is to some extent mitigated by the subsequent comprehensive discussion of the recitals and overall objectives of the Directive. Here, the Court addresses the big question: If a deposit-guarantee scheme functions as a ‘lifejacket’, why does it not save anyone here?
One may agree or disagree with the Court’s conclusions, but at least the issue is clearly addressed at this point of the decision. For the EFTA Court, the Directive is only made for bankruptcies of individual banks, and therefore it is a normal consequence of a systemic crisis that deposit-guarantee schemes fail in such situations, leaving the depositors unprotected. If the waves are too big, the lifejacket won’t save you. As another commentator has noted one can also read this narrow interpretation of the Directive as the Court putting ‘the ball back into the legislator’s court (where many would argue it properly belongs)’. Even then, arguably it would have been preferable to start off the decision with the mentioned discussion of the overall scheme of the Directive, which would then have saved the Court from engaging in the mentioned rather less convincing piece-meal literal interpretation of the Directive’s individual provisions. What remains to be seen is whether this narrow interpretation of the Directive is also acceptable for the CJEU. There is no direct link between the two courts, but both courts can be asked the same question – and differ in their answers. A rare occurrence, but it has happened before…