FORMAL FRAMEWORK OF THE RULE OF LAW IN THE CONSTITUTIONAL ORDER

The United Kingdom is almost unique in not possessing a codified constitution. Nevertheless, there is clear evidence that the rule of law is one of the fundamental features of the constitutional order, with a long constitutional history. It is found in principles of the common law and in legislation. However, despite being a fundamental feature of the UK constitution, its importance is balanced with other fundamental features – most notably parliamentary sovereignty. Whilst the rule of law may place limits on the law-making powers of the devolved legislatures, and on the Westminster and devolved executives, it places no legal limit on the law-making powers of the Westminster Parliament.

The rule of law – understood in its broadest sense of government according to the law – can trace its roots back to Magna Carta, in particular the principle that no individual should be punished save through the mechanisms of the law. The protection of the rule of law was also developed through the common law. This can be seen, in particular, in the judgments of Coke, alongside his accounts of English law. In its earliest incarnation, the rule of law in the UK can best be understood in a procedural sense, based on an understanding of the principles of natural justice – that nobody should be a judge in their own cause and the right to a fair hearing.

The economic and financial difficulties encountered by European States since the global 2007–2009 financial crisis have led to a loss of trust in the banking and financial system, and have made the previous theoretical assumption of the bankruptcy of credit institutions perceptible. The financial crisis showed the importance of maintaining depositor confidence in the financial system, and using such tools as increases in deposit insurance coverage and strengthening of funding arrangements, to support financial stability. In a changing world, challenges with respect to deposit schemes are numerous. In June 2017 (i) an agreement was reached at the EU and Italian levels to recapitalise the Italian Banca Monte dei Paschi di Siena, and (ii) the Spanish Banco Popular Espanol S.A. was put into resolution and its equity instruments were transferred to Banco Santander S.A. The failure of those two credit institutions illustrates the fact that bankruptcies of banks are not hypothetical, 10 years after the Lehmann Brothers collapse. March 2023 proved that risks on deposits still exist. Indeed, US regulators rushed to seize the assets of Silicon Valley Bank (SVB) after a run on that bank, the largest failure of a financial institution since the height of the financial crisis more than a decade ago. Pursuant to a 12 March 2023 Joint Statement by the US Department of the Treasury, US Federal Reserve, and US FDIC, the resolution of Silicon Valley Bank was announced to be executed in a manner that fully protects all depositors.

INTRODUCTION

Relying on a ‘tragedy of the commons/anti-commons’ analysis, this contribution seeks to develop a conceptual framework that explains and justifies both the procedural and substantive transformation of property rights in corporate insolvency and bank resolution. On that basis, the chapter further seeks to predict one of the unintended consequences of the new bank resolution framework: a likely increase of the costs of capital for medium-sized and less complex institutions, that may result in a further consolidation of the banking sector over the long term. This goes against the underlying rationale of the bank resolution framework to effectively tackle ‘too-big-to-fail’.

The commencement of proceedings with a view to resolving financial distress, and to a lesser extent the financial state of insolvency, can have a transformative effect on the property rights held by counterparties of the debtor. The term ‘property right’ is here used in a broad – economic – sense, encompassing personal (contractual) rights as well as proprietary interests (ius in re). Depending on the legal system, contractual obligations and security interests may no longer be enforceable; after-acquired property clauses in security agreements may be ineffective; rights acquired pre-commencement may be subject to a challenge under voidable transfer laws; mutual obligations may be reduced to a net balance; and debt may be deferred, written down or converted to equity. As a general principle, in a market economy parties are free to agree on any amendment of their rights and obligations. In the insolvency context, they may do so ex post through a contractual workout,

INTRODUCTION: A REGULATORY PARADOX

The regulatory response to the financial crisis has had a paradoxical effect: stricter public supervision of the financial sector has led to more private selfregulation. So-called codes of conduct and codes of ethics, i.e. self-made rules of banks, banking groups and associations, have proliferated in recent years They have grown in number, and they have often grown in length. But – have they also grown in importance? This will be the subject of this contribution, with a specific view to the doctrine and practice of European contract law.

The contribution will proceed in three steps. As a first step, it will try to explain why and how the proliferation of private codes in the banking sector is a consequence of stricter public regulation (below section 2). The second step will be a brief look at a practical example of a conduct code in the banking sector (below section 3). The main focus will be on the third step. Here, the contribution aims to analyse the different ways in which codes of conduct might have legal effects on the relationship between the bank and its customers (below section 4). The contribution will then draw some conclusions, which might be relevant not only for the field of banking law, but for contract law more generally.

THE SPREAD OF ADR BANKING AND FINANCIAL SYSTEMS IN EUROPE

Alternative Dispute Resolution mechanisms (ADR) have become increasingly widespread in Europe over the last two decades, being favoured by the laws of both the Member States and the Union, especially with regard to the trade of banking and investment services (and, to a lesser extent, insurance services as well).

Directive 2013/11/EU refined the general framework of ADR for consumer disputes in the Union's law, which was further specified by the Regulation (EU) No. 524/2013 on Online Dispute Resolution for Consumer disputes (CODR). The depiction of these mechanisms as ‘alternative’ means that they strive to settle disputes out of court, and it thus implies a neat opposition between them and the judicial systems of the Member States. However, it is less appropriate than in the past to draw a line between these two realms of civil justice, since on the one hand the boundary between them is becoming increasingly blurred, and on the other hand, ADR systems cannot be properly understood as (just) a means to address the shortcomings of the judicial process and to diminish the number of cases pending before the courts.

The nature of ADR systems is highly mutable, both in terms of their architecture and of the type of activity carried out in pursuing the settlement of disputes brought to them. In the banking and financial markets, particularly, the panoply of techniques used by ADR systems covers a broad array of services, ranging from a ‘soft’ facilitation of amicable solutions between the parties (mediation) to proper adjudication of cases by arbitrators, be they monocratic or sitting in a panel.

INTRODUCTION

The effectiveness of EU law largely depends on national enforcement mechanisms. This concerns both national authorities executing EU administrative law and private parties enforcing EU law content. In EU banking regulation, most attention has been devoted to the administrative enforcement of regulatory goals at the national and EU levels. Private law has not played an important role in this context so far. This starkly contrasts with other areas of EU regulation where private law remedies have increasingly gained importance, namely competition law and capital markets regulation. In competition law, the ECJ first ruled in Courage that EU law required individual compensation rights for anybody negatively affected by a cartel and later specified conditions for cartel damages claims. The EU legislator then introduced the Cartel Damages Directive. In capital markets regulation, private law duties are sometimes explicitly codified in EU legislative acts and are sometimes the subject of discussion. The Transparency Directive and Prospectus Regulation provide for individual liability mechanisms. In contrast, it is a matter of debate if and to what extent the MiFID II provisions on investment advice contain private law duties. In any case, private enforcement has moved to the core of discussions on competition law and capital markets regulation.

INTRODUCTION

The Directive 2014/59/EU has considerably widened the crisis prevention measures used to intervene when a bank is experiencing difficulties, to prevent them from worsening. Indeed, due to the limitation on shareholders and creditors’ rights that is entailed as a consequence of a decision adopted by a public authority, ‘resolution’ should be only adopted as a last resort measure when there are no reasonable prospects that any alternative supervisory action or private sector measure can prevent the bank's failure.

Yet, the new recovery and resolution framework provides for neither special negotiated solutions of the crisis, nor harmonised rules on financing arranged by the bank during the recovery or early intervention phase (‘funding for recovery’). In addition, the more volatile market environment linked to the new ‘bail-inable’ regime and the lack of a credible public backstop may make it more difficult to arrange early intervention measures and private sector solutions.

Crisis prevention measures and the resolution framework provided for in the Bank Recovery and Resolution Directive (BRRD) can affect the contractual relationships between banks and investors and the incentives to the latter to provide funding for recovery.

We will first recall the current provisions in the Bank Recovery and Resolution Directive on preventive, preparatory and early intervention measures that are especially relevant for the effects that they may have on contracts.

INTRODUCTION

The problem of liability of national financial supervisory authorities (FSAs) transcends the classical division between public and private law. The duties of the authorities are regulated by public law, but liability claims by aggrieved persons are rooted in private law. Entitlement to private law remedies is not limited to individuals such as depositors and embraces other actors in the financial markets (banks, insurers, stock exchange, etc.) which can suffer damage to reputation or to their financial position in the market, and possibly their shareholders.

In recent years European courts have increasingly admitted the possibility of seeking civil remedies, specifically based on tort law, against FSAs and/ or the state. The nature of the liability of FSAs is tortuous, as a contractual relationship between a public authority and an injured individual cannot be established. This contribution reviews the case law and provides a theoretical framework for such claims. Latest comparative research by R.J. Dijkstra has shown that no common approach to financial supervisory liability exists in the EU Member States. Nevertheless, we should try to identify some convergences or at least common trends in the present developments.

PUBLIC AUTHORITY LIABILITY MATRIX

We should begin with a sketch of the current state of the liability of public authorities in Europe. Depending on the national system, the rules on liability of public authorities belong to either the private or public law domain, or to both. Thus, the problem discussed here may be approached from different angles: civil law, constitutional law, administrative law and EU law.

INTRODUCTION

The legal assessment of foreign currency loans under the Unfair Contract Terms Directive has recently become a topic of major importance in the scholarship on European private law. Litigation regarding foreign currency mortgage loans in several Member States of the European Union, mostly in Central and Eastern Europe, led to dozens of judgments by the Court of Justice of the European Union (subsequently CJEU). This contribution gives a brief account of the Polish experience with foreign currency loans. It focuses on the CJEU jurisprudence inspired by requests for preliminary rulings by Polish courts and its implications for the jurisprudence of Polish courts. The chapter advances the claim that a national legal system which provides no significant regulatory intervention of its own to remedy the consequences of foreign currency lending is far more susceptible to the influence of CJEU law-making than legal systems offering national solutions.

Poland is one of the countries most affected by the legal and economic consequences of foreign currency lending. Early in the 2000s, as interest rates were much lower in Switzerland than in Central and Eastern European countries, the Swiss franc emerged as an attractive currency index for mortgage loans. In 2010 around 64 per cent mortgage loans in Poland were indexed in foreign currency (mostly CHF) with the total value of 40 billion euro.

INTRODUCTION

The European Union incorporated the responsible lending programme into legislation in an attempt to tackle the high levels of indebtedness resulting from the expansion in access to credit and new credit products and lending practices. It did so first, and rather timidly, into Directive 2008/48/EC of 23 April 2008 on Consumer Credit, and then more forcefully into Directive 2014/17/EC of 28 February 2014 on Credit Agreements for Consumers Relating to Residential Immovable Property. The aim was to ensure that professional lenders took consumer needs and interests into account throughout the entire duration of the credit agreement, which entailed both the need to enable consumers to make maximum savings (e.g. via early repayment without penalty) and to prevent borrowers from succumbing to the temptation to commit themselves to risky loan agreements. The expression ‘responsible lending’ is generally associated with good practices in the granting of credit (unfair practices in credit card approval and subprime mortgages would be clear examples of irresponsible practices to be tackled) and with the measures proposed to prevent over-indebtedness: e.g. transparency in the marketing of loans, creditworthiness assessment and the granting of a right of withdrawal. However, it also covers creditors’ obligation to show reasonable forbearance when claiming repayment, for example, by limiting default interest, preventing the abuse of acceleration clauses and seeking to avoid foreclosure actions being carried out before attempts have been made to negotiate with debtors.

INTRODUCTION AND OVERALL THEME

European Contract Law has been affected by mega-developments in society of the last decade in multiple ways. These range from the digital revolution that led to a host of EU legislation, both regulation of individual contractual relationships and of markets and platforms, to a similar revolution with respect to sustainability, which, again with EU legislation as the dominant layer, has led deep into contract and adjoining company and capital markets law as well. Many authors consider these two as the mega-trends of today's law of the enterprise – with the particular characteristic that regulation, company law and banking law are intertwined in particularly dense ways with contract law in these new mega-topics. Much less central in the apprehension of a larger contract law public in Europe is a development that had been triggered by the first mega-crisis in Europe in this decade, the Global Financial Crisis (followed by a whole series of mega-crises in Europe). This development, however, can well be seen as being just as important and indeed pointing in a similar direction. Moreover, it may even predate the other developments named. It may well be that the European Banking Union – created as a response to the global financial crisis (in 2008) and to the Euro sovereign debt crisis (in 2010) – constitutes the first instance of a decidedly common (public) good oriented reform. In other words: this may well be the first instance of a public good trend in the areas where autonomous party decisions typically reigned supreme, a trend that can be seen as a fundamentally new ‘green box approach’.m