LEGAL ANALYSIS:One aspect of the European Commission's handling of the current financial crisis that has received relatively little mainstream coverage is the way in which it has applied the state aid rules to the measures taken by the member states to shore up their financial systems and to rescue their banks and in the process greatly expanded its oversight role in financial services markets.
This lack of attention is surprising because (within the relatively staid world of financial regulation and competition law policy) it is an intriguing tale of power struggles and tactical compromises, with long-lasting consequences for some leading players, including the main Irish banks.
In addition, there are no signs that the commission will be abandoning the use of the state aid rules as a monitoring tool for financial markets and transactions in the post-crisis period. It has already explained in very clear terms the role it expects to play, under the state aid rules, in the privatisation processes that are under way in a number of member-states (including Ireland).
It was clear from the outset of the crisis in 2008 that the measures adopted by the most seriously affected member-states fell within the definition of state aid in Article 107 of Treaty on the Functioning of the European Union (TFEU), and that, as a result they should have been notified to the commission, which has exclusive jurisdiction under the treaty to clear state aid measures.
Rules questioned
It was less clear that the member states would submit their plans to the commission and wait for its approval. Many politicians – notably former French president Nicolas Sarkozy, openly questioned the utility of the state aid rules in times of crisis and argued that they should be relaxed to allow member states develop their own national responses free of restraint.
Some governments simply ignored the rules. In Ireland, for example, the guarantee scheme for banks introduced by the late Brian Lenihan in September 2008 was notified only after the commission contacted the Irish government “seeking further information”. The scheme was eventually cleared.
On the commission side, there was recognition that, while it was essential to maintain the commission’s exclusive state aid jurisdiction, a “business-as-usual” approach would not work.
The commission’s response in the early days of the crisis, when the stakes were highest, was threefold. First, it dusted down a previously unused state aid provision, Article 107 (3) (b) TFEU, that allows it to clear aid “to remedy a serious disturbance in the economy of a member-state” – this is the legal basis it subsequently used for more than 400 financial services decisions.
Secondly, it undertook to deal very quickly with urgent cases (some decisions being taken in less than 24 hours). And thirdly, it published a series of communications outlining its approach on key issues, starting with an October 2008 communication on state guarantees and following with communications on bank recapitalisations, bank restructuring and the establishment of impaired assets agencies.
This astute political manoeuvre, largely led by the redoubtable Dutch commissioner, Neelie Kroes, saw off the clamour for the disapplication of the state aid rules; the commission settled into its new role, micro-managing the distressed parts of the European financial system. Each bank that received rescue or recapitalisation aid was required to submit a restructuring plan to the commission, drafted to comply with the commission’s Bank Restructuring Communication, explaining the bank’s proposals to restore itself to viability, the measures it would take to prevent undue distortion of competition as a result of the aid and the contribution that the bank and its shareholders would make to the restoration of viability by means of “burden sharing”.
Significant divestments
This final element has led the commission to insist on state-aided banks agreeing to significant divestments of assets and businesses in non-core markets. In the case of Bank of Ireland, the commission’s 2010 clearance of its restructuring plan was based on commitments significantly to reduce the bank’s presence in the UK corporate lending market, to sell its New Ireland Assurance Company plc, its mortgage-brokering business, ICS Building Society, and the 17 per cent stake it owned in Irish Credit Bureau. Bank of Ireland also agreed to provide services to new entrants or to small banks active in Ireland to reduce their costs, including a “service package”, with back-up services and access to its ATM network.
At the same time the commission, basing itself on its Impaired Assets Communication, took an active role in assessing the terms on which impaired assets agencies, such as Nama, were established. The then Irish government notified the Nama legislation to the commission at the end of 2009 and, when clearing the measure early in 2010, the commission required that the transfer of each tranche of assets to Nama should be separately notified for detailed scrutiny. They were subsequently cleared.
All of this represents a major change. Prior to the crisis, the financial sector was very rarely subject to state aid review by the commission. Now, as a result of the crisis, large parts of the European banking system are owned by member-states and subject to commission scrutiny and significant numbers of banks have been restructured with the active participation of the commission; the commission has been a protagonist in the recovery plans of the most affected member states.
And current indications are that the commission, acting under the state aid rules, will continue to play a central role in the post-crisis recovery, particularly in relation to the privatisations. In February 2012, it published detailed guidance on its approach to the restructuring and privatisation of state-owned enterprises.
MEVP principle
The guidance explains that, when reviewing privatisations to ensure that state aid is excluded, the commission will rely on what it calls the “market economy vendor principle” (MEVP), essentially comparing the proposed terms of the privatisation with the behaviour it would expect from a vendor in the private sector.
The commission’s underlying assumption is that a private vendor would seek to sell its business for the highest possible price and without imposing conditions that would be liable to depress the price. If the commission finds that the member-state behaves differently, its concern is that the privatisation will involve a foregoing of state resources to the benefit of the buyer or the privatised company and that some form of state aid may be present. Prior notification and clearance may be required before the privatisation can proceed.
Damian Collins is a partner with McCann FitzGerald, based in the firm’s Brussels office. He advises clients on competition law, state aid, communications and market regulation issues.