STATE OF PLAY

Staying up-to-date with the temporary framework for state aid

The European Commission has adapted state aid rules quickly and responded flexibly to requests for approval. Financial institutions should ensure they stay abreast of further updates to the Temporary Framework and continue to be vigilant against risks of fraud.

In March 2020, the European Commission adopted a Temporary Framework for state aid in response to the escalating COVID-19 crisis.

Firms should be reassured by the pragmatic approach that the Commission is taking and by the Commission’s willingness to extend and enhance this framework a number of times over recent months.

The legal framework

  • Article 107(2)(b) TFEU enables Member States to make good damage directly caused by “exceptional occurrences”.
  • Article 107(3)(b) TFEU allows the Commission to declare aid “to remedy a serious disturbance in the economy of a Member State” compatible with the internal market.

Pursuant to these provisions, the Temporary Framework for state aid was introduced in March 2020 to help Member States navigate the economic turmoil arising from the COVID-19 crisis. The scope of the Temporary Framework has already been extended several times since its introduction.

The current Temporary Framework vs the approach adopted in the aftermath of the financial crisis

When the 2008 financial crash hit, as with COVID-19, a co-ordinated response to mitigate the impact of the crisis was required. The Commission quickly invoked Article 107(3)(b) TFEU to approve Member States recapitalising financial institutions to stop them breaching regulatory capital requirements or collapsing entirely. The Commission has clearly learned some important lessons from its response to the financial crisis, not least the importance of producing a temporary framework as quickly as possible. In 2008, it took the Commission three weeks to issue the state aid framework. Twelve years on, the Commission managed to publish the COVID-19 framework in a matter of days. Notably this time around the Commission’s Temporary Framework is also geared towards approvals of umbrella schemes, which give national governments the power to grant certain types of aid instead of requiring multiple individual notifications and approvals. Putting more power into the hands of national governments has streamlined processes and significantly reduced both the Commission’s workload and uncertainty for entities seeking support. A further important aspect of the current framework is to provide for schemes allowing governments to guarantee loans provided to businesses by mainstream commercial lenders. Financial institutions are therefore an integral part of the COVID-19 framework.

When will the mechanism be unwound?

Upon its introduction, the Temporary Framework was intended to apply until December 2020. Given the uncertainty at that time, it was always likely that the Framework would need to be extended beyond such a deadline and, in July 2020, the Commission announced it had decided to prolong the Framework’s validity into 2021. Now the question is: how and when the mechanism will be unwound?

It remains to be seen whether the Commission’s flexibility and pragmatism will become a more permanent feature of European state aid control.

There has been much discussion of “long COVID” in a physiological sense but, as the virus continues to ravage the global economy, it seems that COVID-19’s economic impact is also likely to be a long-term condition. It remains to be seen whether the Commission’s flexibility and pragmatism will become a more permanent feature of European state aid control, out of necessity or otherwise.

Why is this relevant to financial institutions?

Alongside the lessons learnt from the 2008 financial crisis, recently there has been extensive press coverage of investigations into fraudulent claims under state aid schemes in the UK and further afield.

In these unpredictable times, financial institutions should continue to focus on compliance and risk mitigation.

Recent investigations by the Cabinet Office1 suggest that the scale of fraud could be considerable in the UK. Financial institutions implicated in fraudulent lending will undoubtedly face regulatory scrutiny and the associated reputational risks should not be underestimated. And in these unpredictable times, financial institutions should continue to focus on compliance and risk mitigation so they don’t get entangled in any fraudulent lending.

1 Investigation into Bounce Back Loan Scheme - HM Treasury, Department for Business, Energy & Industrial Strategy, British Business Bank plc

CONCLUSION

Despite the approval of unprecedented levels of aid under the Temporary Framework, severe liquidity issues remain a serious threat to the survival of businesses of all shapes and sizes and the longer-term prospects for many are highly uncertain.

While the overarching framework is subject to change and state aid schemes are being approved at speed, compliance risks further down the chain are increased. Accordingly, it is important that financial institutions are aware of the most recent changes to the state aid landscape and the regulatory obligations for institutions involved in state support schemes

This article was written before the EU and UK agreed the TCA and therefore does not address UK subsidies controls.


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MEET THE AUTHORS

CHRIS BRYANT

Partner, London

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DORAN BOYLE

Associate, London

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SANDY AZIZ

Knowledge Development Lawyer, London

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

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