European Banking Authority disregards conflicts of interest
Internal documents reveal a real disregard for ethics rules at the European Banking Authority. Revolving door scandals include the Director’s move to a powerful finance lobby group, and a former big bank lobbyist as Chair.
This week the European Banking Authority (EBA) is facing a severe slap on the wrist from the European Parliament. In a draft resolution likely to be adopted on 16 January 2019, MEPs are asking the agency to reconsider its decision to approve the move of its Director Adam Farkas to a job as Chief Executive of the biggest and perhaps most powerful European finance lobby group, the Association for Financial Markets in Europe (AFME). The committee is also calling on all MEPs not to meet with Farkas for two years. If approved, this will constitute a rare and significant rebuke to the EBA.
It is no wonder this revolving door case has attracted this reaction, which gives the clear impression that the EBA has little concern in preventing conflicts of interest. Farkas undoubtedly has important know-how and networks from his position as a senior banking regulator at the EBA, and these are likely to be of great value to the vested interests of AFME. Moreover the move could incentivise future top civil servants – at the EBA and elsewhere – to cultivate good terms with industry while in office, so as to be rewarded with similar, generous job offers later. While we don’t know Farkas’ new salary, his predecessor at AFME is said to have earned well over one million euros annually. Internal documents released from the EBA reveal the deeply-flawed approach by the EBA on this, and another recent high-level revolving doors case; documents that have now led to a complaint (from Corporate Europe Observatory, among others) to the European Ombudsman.
AFME – the opposing side
AFME is a finance lobby group, a coalition dominated by US and European megabanks, and since its inception in 2009 it has risen to become the most resourceful finance lobby group at the EU level, and perhaps the most powerful as well. As the EBA performs a crucial role in EU banking supervision and regulation, AFME is a regular visitor at the agency (read more about AFME in a previous article on the case). To allow the EBA Director to move straight to running the lobby group appears completely irresponsible.
There are rules supposed to prevent this. Specifically, the EBA is required to apply the EU Staff Regulations which in article 16 reads that the institution must adopt “restrictions” when a civil servant notifies them of a new position they have been offered and which could imply a conflict of interest. Also, the institution may “forbid him from undertaking it”. However the EBA appears to have taken a lax approach to the rules.
The EBA has acknowledged the difficulties of the Farkas case. In a letter to the Change Finance Coalition, the Chair of the EBA José Manuel Campa stated that there is a “substantial conflict with the legitimate interests of the EBA” at play. Given such concerns, it is reasonable to ask why the EBA did not simply reject the application, or ask Farkas to postpone his engagement with AFME for a significant cooling-off period?
A ‘fundamental right’ as trump card
But the EBA chose not to do this, citing Adam Farkas’ “fundamental right to engage in work” inscribed in the European Charter of Fundamental Rights. “I think it is important to realise there is a fundamental right that’s perceived to be a human right and this was an important weight on our decision according to our legal advice: that we cannot forbid a person to earn a living through their work,” José Manuel Campa told parliamentarians at a session of the Committee on Economic and Financial Affairs (ECON) on 4 November 2019.
But this argument is very thin. It is hardly the case that the only employment available to a civil servant heavyweight such as Farkas is in the finance lobby! And if Campa’s argument were to be fully accepted, it would render article 16 of the Staff Regulation entirely meaningless, as it could always be trumped by the “fundamental right to engage in work”.
Not even considered
It looks as if blocking Farkas’ move was beyond the imagination of those who advised or made the decision at the EBA. Newly-released internal documents from the banking authority – including documents on rules and procedures and advice given by internal committees – suggest the option of blocking the move to AFME was never seriously considered. The advice provided by two separate advisory bodies at the EBA (the Joint Committee and the Advisory Committee on Conflicts of Interest) does not mention that option at all, nor is there any sign in the minutes from the relevant meetings of the two main executive bodies, the Board of Supervisors and the Management Board, that blocking was an option on the table.
Based on that, it is not clear why Campa told MEPs that “legal advice” had forced them to rule out this option.
Instead of banning Farkas from the AFME role, the EBA decided to approve the move, but with a series of what Chair Campa has called “significant restrictions”. Farkas was told to only work on administrative issues for the remaining four months with the EBA up to his last day on 31 January 2020. Once at AFME he will be prohibited from engaging in lobbying the EBA or its staff for 24 months. These two restrictions can be enforced by the EBA itself. But a third will be far more difficult to monitor and enforce: for 18 months after leaving the service, Farkas is to refrain from assisting AFME members on issues he has worked on at the EBA over the past three years.
Looking at the lobbying priorities of AFME it seems this restriction will make it essentially impossible for Farkas to perform the job of Chief Executive: the EBA works on 23 of a total of 25 policy areas listed by AFME. It would surely be surprising if AFME were happy to see Farkas perform only eight per cent of the tasks covered by his predecessor! No wonder MEPs are worried that this third restriction will mean little or nothing once Farkas has joined AFME.
Restrictions not even the EBA trusts
The EBA has publicly acknowledged the difficulty, albeit cautiously. At the hearing in the ECON committee of the European Parliament, Chair Campa stated that the EBA’s ability to enforce the restrictions are “somewhat more effective in the first phase”, ie while Farkas is still with the EBA. But clearly it is the second phase, when Farkas has left for AFME, that matters. While it may be feasible to prevent Farkas from engaging personally with the EBA, it appears impossible for the EBA to ensure he doesn’t advise AFME and its members on the vast majority of the essential issues within its remit.
This specific problem was brought up at the meeting of the EBA’s management board on 10 September 2019 when the decision on Farkas’ proposed revolving door move was made. The board asked for clarification on how the EBA could monitor the activities of its former Director after he had left the service. In response the European Commission representative remarked that “the onus was on the addressee of the decision to comply with its contents while the EBA had to monitor and, if necessary, enforce the limitations in the Decisions, even if in practice there are limited means to do so” (emphasis added). In other words, the EBA has pinned its hopes on Farkas himself respecting the restrictions. The EBA itself appears powerless as far as enforcement is concerned.
An investigation into this revolving doors case by the Change Finance coalition, which includes Corporate Europe Observatory, has now led to a complaint to the European Ombudsman with the support of MEPs from four party groups (the left, greens, social democrats, and the liberal Renew group). We seek the Ombudsman’s ruling on whether the approval of Farkas’ move to AFME constitutes maladministration and should therefore be annulled. We have also made serious criticisms of the procedure around the approval and the mindset that this reflected, for instance the fact that EBA never seriously considered rejecting a direct move from the EBA to AFME, and the apparent absence of a serious investigation into likely problems arising from this revolving door move.
The final approval of the move was given by the EBA’s board of supervisors and the Chair of the EBA (Campa), all of whom have positions very similar to that of Farkas, in that they are heads of national financial services authorities, and in most cases, they have worked with him for a long time. Some of them have even gone through the revolving door themselves, or perhaps would like to keep that option open in the future. In other words, he received his carte blanche from his peers, many of whom could be said to have an interest in playing down the implications of rules on revolving doors. There is little sign of real independence within the EBA’s procedure.
The second revolving doors story
It can be argued that the biggest problem with the case – as far as independence is concerned – is the person who has handled the Farkas case from day one, Chair Campa. When he was elected to the role in early 2019 it caused a stir as Campa came straight from a position as the top lobbyist for the Spanish megabank Santander. He had been in the ranks of the finance lobby in Brussels for quite some time but he was then allowed to pass through the revolving door, to switch from being ‘the regulated’ to ‘the regulator’. He faced the Farkas case within only two months of his first board meeting in June 2019. As someone who had just entered through the revolving door, he could hardly be expected to object to such moves, or to be tough on conflicts of interest.
Circumventing staff regulations
Bizarrely, the EBA did not complete its decision-making on how to handle Campa’s own conflicts of interest until after he had already taken office as Chair! Indeed, the EBA’s decision on restrictions on Campa’s move to the EBA was decided in parallel to the Farkas case. The final decision on Campa was dated 20 September 2019, only five days after the decision on Farkas. Chiefly, the Campa decision addressed two separate problems: how to deal with his links to his previous employer Santander, and how to address the fact that Campa had been given shares in Santander when leaving for the EBA. The decisions on both counts were shocking.
The EBA’s management board asked Campa to avoid contact with representatives of Santander for two years, and to “recuse himself from any decision-making…which is of direct and individual concern to Santander” (emphasis added). In other words, if a matter relates to Santander only the Chair has to stay out of it. But conversely, if a matter concerns big banks more generally – including Santander – no measures are considered necessary by the EBA.
A self-serving Chair?
This weak approach to conflicts of interest becomes starker when considering that the EBA allowed Campa to keep his shares in Santander (the value of which is not in the public domain) even though this means that he has a personal financial interest in how Santander fares, and hence in the kind of measures the EBA may adopt that affect the bank.
The shares in Santander (allegedly in the form of stock options) are to be kept until February 2023 – and it is not difficult to see how that model is in the interests of Santander. But is this not against the rules? After all, article 11.A.3 of the EU Staff Regulations says: “An official may neither keep nor acquire, directly or indirectly, in undertakings which are subject to the authority of the institution to which he belongs or which have dealings with that institution, any interest of such kind or magnitude as might impair his independence in the performance of his duties.”
Yet the EBA’s own internal rules do not include a clear-cut ban on retaining or acquiring shares that create a conflict of interest. The problem for the EBA, however, is that the EU Staff Regulations continue to apply to the chair alongside any additional, internal rules. So far, this has been ignored by the EBA.
A broader problem
The Farkas and Campo cases reveal the deep problem that the EBA has with ethics, the revolving door, and conflicts of interests. This relates to its rules, procedures, and most worryingly of all, the mindset of the EBA. And the problem appears to be systemic: for example, in 2019 the EBA came under criticism for allowing the heads of financial services’ authorities to vote against a report on their own mishandling of a money laundering case, even though they were directly implicated in the case.
When MEPs vote on the EBA this week, it should be a sign that pressure is mounting, and will hopefully create momentum for a first step towards an overhaul of rules and procedures at the EBA, starting with the revolving door.