Bank of Slovenia’s position on the amendments to the Act on Judicial Relief Granted to Holders of Qualified Bank Credit

The Bank of Slovenia has studied the amendments to the Act on Judicial Relief Granted to Holders of Qualified Bank Credit (ZPSVNIKOB) submitted by the parties of the governing coalition on 21 June 2019 and published on the National Assembly website.

We believe that the proposed amendments do not address the questionable solutions in the original version of the ZPSVNIKOB, to which the Bank of Slovenia drew the attention of the prime minister and the finance ministry in its letters of 5 March, 8 April and 6 May 2019. We are therefore highlighting the key comments in this connection again.

As previously explained, the original version of the ZPSVNIKOB was questionable from the perspective of the prohibition on monetary financing. This prohibition prevents a central bank from using central bank money to finance government tasks/liabilities. The prohibition is set out by national legislation, and by EU primary law (the TFEU). The ZPSVNIKOB bill was also questionable from the perspective of financial independence, which is also demanded by primary law in the EU and Slovenia (the constitution). Attention was also drawn to these inconsistencies by the European Central Bank in its opinion of 27 March 2019 (CON/2019/13), and by the National Assembly’s legislative and legal service in its opinion of 14 June 2019.

The amendments are attempting to further emphasise that the bill regulates procedures under Article 350a of the ZBan-1, whereby the proposers are following the position that the Bank of Slovenia’s liability for any deprivation incurred under the aforementioned provision of the ZBan-1 should be objective, irrespective of illegality and culpability. Even if this position were correct (the reasons why it is evidently not correct were set out in detail in the letter to the finance ministry of 6 May 2019), it should still be noted that the Bank of Slovenia was not the sole institution that made decisions about bank resolution in 2013, and that this position also does not mean that the Bank of Slovenia is required to finance compensation for any deprivation. Several other actors were involved in the bank resolution process: the government and the finance ministry, EU institutions, independent appraisers, etc. The Bank of Slovenia’s future profits, which are otherwise earmarked for its general reserves, are defined by the amendments as the main source for making payments of damages, together with the general reserves already created. Given that central bank funds will continue to be used to pay damages, irrespective of who is actually liable for the damage, this arrangement is still questionable from the perspective of the prohibition on monetary financing.

In addition, such a total subjugation of the central bank’s general reserves to one objective alone (paying compensation for damage incurred during bank resolution) would also be questionable from the perspective of the financial independence of the central bank. Central banks should have sufficient resources at their disposal to carry out their tasks, the priority among which is the implementation of Eurosystem monetary policy. The central bank must have the ability to create reserves for carrying out its basic tasks. This has been emphasised on multiple occasions by the ECB in its opinions (e.g. CON/2019/21). Bank resolution is the task of the owners and the government, and not the central bank.

The Bank of Slovenia has also highlighted on multiple occasions that the involvement of EU institutions is vital to the full establishment of the actual facts in connection with the bank recovery and resolution in 2013. The Civil Procedure Act (ZPP) is not tailored to the special rules governing the involvement of EU institutions and their employees in proceedings before national courts. The ZPP stipulates inter alia that a witness can be compelled to testify, and the court may fine or even jail a witness who refuses to testify. Representatives of EU institutions are guaranteed immunity under the TFEU. Owing to the aforementioned provisions of the ZPP, there is a real risk that EU institutions will not be willing to participate in judicial relief proceedings under the ZPSVNIKOB. Given that the potential compensation for holders of subordinated debt will be provided from public resources in this manner or otherwise, fully clarifying the actual facts and the question of entitlement to compensation is key. This will require the involvement of EU institutions and their staff, which will need the proper legal basis to be put in place, as already proposed by the Bank of Slovenia. Furthermore, in light of the complexity of the matters of expertise that are also regulated by EU law, the Bank of Slovenia also proposed that expert witnesses who have international experience in the area of bank resolution (assuming that there is no conflict of interest) should also participate in the proceedings. This proposal, which in our opinion could only be of benefit in clarifying the actual facts, was not accepted. The aim of these Bank of Slovenia proposals is to prevent a situation when proceedings under the ZPSVNIKOB would lead to compensation payments being made without any prior determination of what actually happened.

We further find that the amendments designate the Bank of Slovenia as the misdemeanours body for sanctioning breaches of the rules for operating data rooms, despite the Bank of Slovenia’s warning that it is not suited to exercising these powers owing to a conflict of interest. This means that the Bank of Slovenia as the defendant would decide on the appropriateness of plaintiffs’ access to data rooms, and their use/protection of data and documents. In our opinion this situation would not provide for effective judicial relief, as required by the constitutional court.

The proposed amendment to Article 15 introduces the possibility of the court setting the Bank of Slovenia a deadline period of just three months for responding to a lawsuit (or a maximum of six months), while plaintiffs have seven months at their disposal from the public announcement of the creation of a data room. The Bank of Slovenia would therefore have to respond to various claims (the amendments have expanded the types of possible claim) by numerous plaintiffs, to fill the data room with documents, and to conduct misdemeanours proceedings in this connection, all within a deadline that could potentially be extremely short. All of this will be exceptionally demanding in terms of workload, and will not allow the Bank of Slovenia to draw up adequate responses to lawsuits. Here it should be highlighted that the bill remains unchanged in the part envisaging the reversal of the burden of proof to the detriment of the Bank of Slovenia. The Bank of Slovenia draws attention to the opinion of the legislative and legal service, which highlighted the need for different treatment of different types of claim, including in connection with the response to lawsuits, and the need to uphold the Bank of Slovenia’s (constitutional) right to be heard. Given the potentially large volume of lawsuits, the diversity of the claims, the complexity of the disputes and the other circumstances cited above, were such a deadline for responding to lawsuits to be enacted, this right would undoubtedly be infringed.

We are of the opinion that with regard to the financing of any compensation the law could also be adjusted to the specific comments without incurring any additional adverse consequences for the government. The Bank of Slovenia proposed several possible solutions to the finance ministry in connection with the distribution of its profit, but unfortunately the ministry did not consider these proposals. In no way does the Bank of Slovenia oppose the legitimacy of its actions being judged in proceedings, as established by the ZPSVNIKOB. The Bank of Slovenia, however, cannot ignore the issues highlighted above, and in the case of encroachments on its independence and breaches of the prohibition on monetary financing it must draw attention to them and take appropriate action. From the perspective of the earliest possible conclusion of the judicial disputes, it is vital that the ZPSVNIKOB properly resolves the key questions in connection with the Bank of Slovenia’s status and the corresponding requirements deriving from national legislation and EU law. The timely resolution of the unresolved issues will prevent them from being addressed later as one of the issues that are impeding the progress of proceedings under the ZPSVNIKOB, and in addition will prevent the risks inherent in breaches of EU law.

Finally we should further warn that in the event of amendments of this type to the bill that significantly alter the content on which the ECB was briefed and in response to which it provided its opinion, even though its opinion was not taken into consideration, the ECB needs to be briefed again on the proposed amendments so that is has an opportunity to provide its opinion on the latest consolidated version.