LONDON- The European Union banking watchdog's guidance to lenders on retail products should be declared invalid, an adviser to the EU's top court said on Thursday, raising questions about financial supervision in the bloc.
The European Banking Authority (EBA), which coordinates how EU banking laws are applied across the 27 EU states, had issued non-legally binding guidance on the supervision and governance of retail banking products.
Such "soft law" guidance, also widely used by the bloc's separate insurance and securities watchdogs, sets out how an EU law should be implemented in practice to ensure consistency across the bloc.
French banking watchdog ACPR had said the guidance should be applied by banks in France, but the French Banking Federation, an industry body, had challenged this endorsement, saying EBA lacked the necessary powers to issue such guidance.
Michal Bobek, an advocate general or adviser to the European Court of Justice (ECJ), proposed on Thursday that the ECJ should rule on the validity of guidance despite their nature as soft law measures, the court said in a statement.
Such guidance should also be open to "normal judicial review".
"Finally, he proposes that the court should find that the guidelines on product oversight and governance arrangements for retail banking products should be declared invalid in so far as the EBA has acted outside the powers bestowed upon it," the statement added.
EBA said the adviser's opinion was "disappointing" and it would await the final judgment of the ECJ.
The court typically backs advisers in most cases.
EBA said the guidance was in response to harm suffered by consumers, it expects banks to continue making "every effort" to comply with it, and would continue issuing guidance. The court adviser said the aim of protecting consumers does not alter his conclusion.
The French Banking Federation welcomed the adviser's conclusions and said it would now await the ECJ's ruling on them.
"I think that it is an indication that the EU courts will take the limits on the parameters of the European Supervisory Authority powers seriously," said Jonathan Herbst, global head of financial services regulation at law firm Norton Rose Fullbright.
Simon Gleeson, a financial lawyer at Clifford Chance, said current EU separation of rulemaking and supervision sees guidance fall into a gap in the middle.
"The logical thing to do would be to merge the EBA into the European Central Bank to create a single regulator and supervisor," Gleeson said.
(Reporting by Huw Jones; editing by Barbara Lewis and Susan Fenton) ((email@example.com; +44 207 542 3326; Reuters Messaging: firstname.lastname@example.org))