Crédit Agricole Secures Annulment of Sanctions Imposed by ECB

Cleary Gottlieb represented Crédit Agricole, Crédit Agricole Corporate and Investment Bank, and CA Consumer Finance in their victory against the European Central Bank (ECB).

By three judgments on July 8, 2020, the General Court of the European Union annulled ECB’s decision to impose pecuniary penalties to Crédit Agricole and its affiliates, Crédit Agricole Corporate and Investment Bank and CA Consumer Finance, of respectively €4.3 million, €300,000, and €200,000.

These entities were sanctioned for having classified capital instruments as Common Equity Tier 1 (CET1) instruments without obtaining prior authorization from the ECB, as a result of a misinterpretation of Article 26(3) of Regulation No. 575/2013. Relying on the inclusion of ordinary shares in the list of instruments eligible to CET1 published by the European Banking Authority (EBA), the banks submitted that that they were not required to seek the prior authorization from the ECB for the classification of a category of instruments included in that list.

The court held that Article 26(3) of Regulation No. 575/3013 must be interpreted as claimed by the ECB (i.e., requiring a credit institution to obtain the permission of the ECB before classifying its capital instruments as CET1 instruments, even though they are listed by the EBA as eligible to CET1) and that the ECB was entitled to sanction them.

The court, however, annulled the pecuniary penalties on the basis that inadequate reasons were given for those decisions. The court pointed out that the contested decisions did not provide any details as to the methodology applied by the ECB for the purpose of determining the amount of the penalty, the ECB did not provide any explanation as to the degree of gravity of the failure to have obtained the prior authorization from the ECB to classify ordinary shares in their CET1 instruments neither as to weighting it gave to the mitigating circumstances the ECB assures to have taken in into account, and failed to mention in the decisions the size of the credit institution, which, according to its own statement, was a factor particularly relevant to the determination of the amount of the penalty.

The General Court’s decisions are the first judgements concerning decisions of the ECB imposing pecuniary penalties as part of its prudential supervision of credit institutions.