By decision No U-I-4/20-66 of 16 February 2023, in proceedings initiated at the request of the Bank of Slovenia, the Constitutional Court annulled in its entirety the Act on Judicial Protection Procedure for Former Holders of Eligible Liabilites of Banks (ZPSVIKOB). The petitioner had submitted a request for constitutional review of a number of articles of the ZPSVIKOB and of Article 350a of the Banking Act (ZBan-1). This provision of the ZBan-1 regulated the liability of the Bank of Slovenia to compensate former holders of eligible liabilities of banks for damages to which the holders are entitled if they prove that the damage resulting from the effects of an extraordinary measure to terminate the eligible liabilities of a bank is greater than it would have been if the extraordinary measure had not been imposed. The ZPSVIKOB regulated the procedure for claiming these damages under the above provision of the ZBan-1 and the mechanism for financing the damages.
The petitioner complained in particular that the contested law was incompatible with Article 152(1) of the Constitution of the Republic of Slovenia, which states that the central bank is independent in its functioning and is directly accountable to the National Assembly. The Constitutional Court emphasised that the autonomy or independence of the central bank must be interpreted in close harmony with EU legislation, and therefore suspended the proceedings in 2021 and referred the case to the Court of Justice of the European Union (CJEU) for a preliminary ruling. In the light of the CJEU’s replies, the Constitutional Court considers it essential that the national rules governing the liability of national central banks for damage caused in the performance of their functions cannot place national central banks in a position which would in any way jeopardise their ability to perform independently the tasks falling within the scope of the European System of Central Banks, i.e., in particular, to ensure price stability. The Constitutional Court has consequently emphasised the importance of the independence of national central banks on the basis of Article 130 of the Treaty on the Functioning of the European Union (TFEU) and Article 7 of Protocol No 4. The purpose of these provisions is to ensure that the European System of Central Banks, of which the Bank of Slovenia is an integral part, is protected against all political pressures, in order to enable it to pursue its objectives effectively.
The Constitutional Court identified the question whether the compensation financing mechanism set out in Article 40 of the ZPSVIKOB may interfere with the financial independence of the Bank of Slovenia as crucial. Article 40 of the ZPSVIKOB provided that all profits made from 1 January 2019 until the finalisation of court decisions on the payment of compensation were to be used to create designated reserves intended exclusively for the payment of the flat-rate compensation referred to in Article 4 of the ZPSVIKOB and compensation to former holders. In the event that the designated reserves were insufficient, the general reserves established before 1 January 2019 were to be used to finance compensation up to half their amount. If even this is not sufficient to pay the final amount of compensation, the remainder was to be financed by the Republic of Slovenia through a loan. The repayment of the loan was to be made from the profits that the Bank of Slovenia subsequently earns and which, as a result, cannot be used to build up general reserves while the loan is still outstanding.
With regard to the mechanism for financing compensation, the Constitutional Court emphasised the importance of general reserves of the central bank. Central banks take decisions in the course of their activities which involve a risk of loss for them, which is why general reserves exist. The adequate level of those reserves indicates that the central bank has anticipated the effects of the measures taken and has them under control. In view of the above, the Constitutional Court concluded that the compensation mechanism under the ZPSVIKOB may have an impact on the ability of the Bank of Slovenia to effectively fulfil its tasks within the European System of Central Banks and prevent it from building up reserves independently. The legal obligation to borrow from the Republic of Slovenia also prevents it from building up general reserves until the loan is repaid. According to the Constitutional Court, the above places the Bank of Slovenia in a position of dependence on political authorities, namely the Government and the National Assembly, where it is potentially exposed to political pressure, which, in the view of the CJEU, is incompatible with the independence of national central banks guaranteed by Article 130 TFEU and Article 7 of Protocol No 4. In light of the foregoing, the Constitutional Court held that Article 40 of the ZPSVIKOB is incompatible with Article 152(1) of the Constitution of the Republic of Slovenia.
Furthermore, the Constitutional Court also assessed the compatibility of Articles 4 to 7 of the ZPSVIKOB with the prohibition of monetary financing. Articles 4 to 7 of the ZPSVIKOB stated the possibility of a flat-rate compensation exclusively for certain small investors of a credit institution whose financial instruments had been terminated. Investors whose annual gross income in 2013 did not exceed a certain amount could claim a flat-rate compensation of 80 percent of the purchase value of the financial instruments at the time of purchase, without having to prove that the conditions for liability for damages under Article 350.a(1) of the Banking Act-1 were fulfilled. The payment of compensation would have been made without establishing whether the Bank of Slovenia had fully complied with the rules applicable to it in relation to the determination of the conditions for termination, or even whether it had acted with due diligence. The Constitutional Court concluded that the provisions of Articles 4 to 7 of the ZPSVIKOB are also unconstitutional, since the flat-rate compensation in those provisions was also to be financed in the same way as the compensation described above. In addition, according to the Constitutional Court, the provisions of Articles 4 to 7 of the ZPSVIKOB are also incompatible with the prohibition on monetary financing laid down in Article 123(1) TFEU and Article 21.1 of Protocol No 4. The purpose of the aforementioned prohibition on monetary financing is to ensure the independence of the national central banks, as it allows for the control of the amount of money in circulation. According to the Constitutional Court, Article 152(1) of the Constitution of the Republic of Slovenia, which provides that the central bank shall be independent in its operations, must be interpreted in such a way that it also contains a prohibition on monetary financing.
The petitioner also requested an assessment of the compatibility of the provisions on the publication of documents and on the virtual data room in Articles 10 to 23 of the ZPSVIKOB with the constitutional right to free economic initiative and the human right to the protection of personal data, but it was not able to demonstrate such incompatibility.
Nevertheless, the Constitutional Court annulled the entire ZPSVIKOB in its decision, identifying the provision of Article 40 of the ZPSVIKOB as the central provision of the ZPSVIKOB, which is crucial for the existence of the entire law. It also explained that the annulment of this article alone does not eliminate the constitutional risks posed by a regime which interferes with the general reserves of the Bank of Slovenia for the purpose of making payments in respect of liability for damages for the performance of a function which is not one of its core tasks and which places the Bank of Slovenia in a position of dependence on political authorities or pressures. Since the Court of Justice has annulled Article 40 of the ZPSVIKOB, the existence of the entire law is consequently no longer of any meaning.
As a result of the annulment of the entire law, an unconstitutional legal vacuum has been created, which the legislator, in accordance with the warning of the Constitutional Court, must fill as soon as possible. In this regard, the Court recalled that the National Assembly has not yet eliminated the unconstitutionality established by the Constitutional Court’s decision No U-I-295/13 of 19 October 2016 and that this has also resulted in the European Court of Human Rights (ECHR) decision in the case of Pintar and Others v. Slovenia. The ECHR pointed out that the Republic of Slovenia had violated the human right to private property of the former holders of the terminated liabilities under the European Convention on Human Rights, and it specifically emphasised that the Republic of Slovenia was responsible for ensuring the rights of the former holders of the terminated liabilities. In light of the above, the Constitutional Court remarked that a legal regulation which would impose the economic burden of errors in the termination of eligible liabilities on any entity other than the Republic of Slovenia as the guardian of the public interest for which the termination was carried out in the first place, would hardly be compatible with the Constitution of the Republic of Slovenia.