Monday 27 January 2014

The EU’s Financial Supervisory Authorities: Mind the Accountability Gap

Dr Marios Costa, Lecturer in Law, City Law School

In 2010 we witnessed the establishment of three European Supervisory Authorities: the European Banking Authority; the European Insurance and Occupational Pensions Authority; and the European Securities and Markets Authority (ESMA). They were set up by the Union as a response to the current, unprecedented financial crisis. The Court of Justice of the European Union (CJEU) gave on 22 January 2014 a significant judgment in relation to more recent legislation empowering ESMA to adopt legally binding measures upon financial institutions of the Member States in the event of a threat to the proper functioning of the financial market or to the stability of the financial system of the EU (Case C-270/12, United Kingdom v Council & Parliament). The legal action concerned the annulment of Article 28 of Regulation 236/2012 in relation to ESMA’s power to ban ‘short selling’, a practice which permits the sale of shares not owned by the vendor at the time of sale with the view of benefiting from a fall in the share price.

There are broader constitutional implications which this judgment highlights. The judgment, which does not come as a surprise, clarifies issues in relation to the powers that can be lawfully exercised by EU independent financial regulatory agencies. This commentary examines, with all due respect, whether the recent ruling will remedy the lack of accountability of EU agencies.

ESMA can draft highly detailed technical and implementing standards which are later on adopted by the Commission under Article 290 and 291 TFEU (which concern, respectively, the adoption of delegated and implementing acts). In relation to Article 290 TFEU, the Commission sets out the conditions and specifies the criteria under which the agency can adopt further regulatory measures of a technical nature, but the drafting of the technical measure always comes from the agency. A very important issue here is whether the Commission has the sources, technical knowledge and scientific expertise required to control the appropriateness of the measures drafted by the agency. If the Commission decides not to adopt the measures drafted by ESMA then it is required to send it back to the Agency and explain why it has decided to not to endorse it (see Article 10 and 15 of Regulation 1095/2010). Interestingly enough, there are extreme limitations imposed upon the Commission. According to the preamble of Regulation 1095/2010, the Commission can only depart form the draft measures prepared by the agency only if they are incompatible with EU law, violate the principle of proportionality or contradict the EU’s financial services legislation.

Facts of the case

The UK government challenged the legality of article 28 of Regulation 236/2012 on the power of the ESMA to ban short selling practices. The Regulation was adopted on the basis of Article 114 TFEU which allows for the enactment of harmonisation measures necessary for the establishment and the functioning of the internal market. The rationale for the adoption of the Regulation and in particular Article 28 is for the ESMA to interfere and issue legally binding measures against the financial institutions of the Member States to prohibit short selling in the event of a threat to the proper functioning and integrity of financial markets or to the stability of the whole or part of the EU’s financial system. The ESMA has wide discretionary power to issue such bans, and it is the only adjudicator of whether such a threat exists.

The UK raised four arguments. First of all, it argued that ESMA is given political powers which entail policy choices to adopt legally binding measures vis-a-vis the financial institutions of the Member States. These powers do not fit well with the old Meroni line of case law, which states that delegation to autonomous bodies is considered to be acceptable as long as Commission retains control powers to monitor how the agency is carrying out its tasks. According to the Meroni line of reasoning, the conferment of broad discretionary power, reconciling competing public interests, to an EU agency cannot be justified on the basis of scientific expertise. In any case, the CJEU has several times emphasised that ‘[s]cientific legitimacy is not a sufficient basis for the exercise of public authority’ (Pfizer). However, in this judgment the Court of Justice ruled that the parent EU legislation, and the delegated and implementing acts adopted pursuant to that legislation by the Commission, sufficiently circumscribed ESMA’s powers.

Secondly, the UK argued that the power for ESMA to ban short-selling breached the principle in Romano that the EU legislature could not delegate the power to adopt ‘quasi-legislative measures of general application’. However, the Court ruled that Romano did not add anything to Meroni, noting in particular that the Treaty provides for agencies to adopt measures of general application.

Thirdly, the UK argued that Articles 290 and 291 TFEU (the provisions on the adoption of delegated and implementing acts) were in effect exclusive, ruling out a contrario the delegation of powers like the short-selling ban to EU agencies. In the Court’s view, the Treaty (in particular, the rules on judicial review) presupposed that agencies could adopt binding acts, and the provision allowing ESMA to ban short selling had to be seen in its overall legal context.

Finally, the UK argued that Article 114 TFEU cannot constitute a correct legal basis for the adoption of the rules laid down in Article 28 of the Regulation. Earlier in 2013 the Opinion of Advocate General Jääskinen concluded in favour of the annulment due to concerns in relation to the appropriateness of the legal basis of Article 114 TFEU. According to his view, the adoption of legally binding measures by the ESMA addressed to the financial institutions of the Member States cannot be considered as EU harmonising measures or uniform practices which could be justified under Article 114 TFEU. The Court, however, decided not to follow the non-binding view of the Advocate General and ruled that Article 114 TFEU constitutes an appropriate legal basis for the adoption of Article 28 of the Regulation since it aims (a) to approximate national law and (b) to improve the conditions for the establishment and functioning of the internal market in the financial field. On the first point, the Court brought together its prior case law which had specified that Article 114 could be a legal base for the creation of EU agencies (Case C-217/04 UK v Council and EP), and for the conferral of power upon the EU institutions to adopt legally binding acts (Case C-359/92 Germany v Council).


The Court’s judgment has significantly clarified the law relating to the conferral of powers to EU agencies. First of all, the Meroni doctrine, while still in force, does not prevent the conferral of such power when the relevant legislative framework is sufficiently detailed. Secondly, the Romano ruling adds nothing to Meroni. Thirdly, Articles 290 and 291 TFEU do not prevent the conferral of powers upon agencies, at least where such conferral of power takes place in the context of an overall legislative framework. Finally, at least the internal market powers of the EU (and arguably, by analogy, other legal bases) do not prevent the delegation of powers to agencies to adopt legally binding measures.

The Court’s ruling gives significant emphasis to the fact that the measures adopted by the EU financial agencies are subject to judicial review under Article 263 (4) TFEU. However, regulatory and implementing technical standards drafted by the EU financial agencies are subject to the Commission’s endorsement and although they constitute the basis for the adoption of the final act by the Commission they are technically and legally preparatory documents and as such they are excluded, in principle, from judicial scrutiny. Additionally, non-privileged applicants, such as financial institutions negatively affected by any ban adopted by ESMA, might not be in a position to satisfy the EU’s locus standi requirements. They may be excluded from direct actions under Article 263 (4) TFEU on the basis that the ban adopted still entails separate implementing measures within the meaning of the Telefonica judgment.

With great respect to the ESMA judgment, the fact that the founding Regulation of the ESMA [Regulation 1095/2010, Article 10(1) and 15 (1)] limits the power of the Commission to proceed with the drafting of technical standards or to unilaterally amend them empowers EU financial agencies with wide political decisions which entail policy choices. The wider implications of the judgment and also of the current framework establishing the agencies seem to suggest what has already pointed out in the literature that ‘in any event, it is clear that EU independent agencies are independent in the sense of being relatively free of control by any other organs of the [Union]’ (Shapiro, 1997). Another point is whether the Commission or the agency will be held responsible in cases where adverse consequences occur if the assessment by the agency proves to be wrong and has further financial repercussions? Moreover, according to the ESMA judgment additional powers could be conferred on agencies to adopt acts of general application outside the scope of articles 290 and 291 TFEU. The delegated and implementing acts of the Commission which detailed ESMA’s powers to adopt the short-selling bans were themselves drafted by…ESMA. This raises important questions in relation to the accountability of ESMA which the Court seemed, with all due respect, to ignore.


The Court’s ruling is important given that it is the first case which deals with the powers of the newly created financial supervisory authorities. It empowers, however, the financial authorities with further powers in order to be able to foresee and secure financial stability in the European Union. Therefore, there are certain constitutional questions that need to be answered: who are these highly independent autonomous bodies answerable to? Scientific legitimacy and complex decision-making in the area of EU’s financial regulation cannot be a legitimate justification for increasing the powers of the EU’s financial agencies, something which can only be accepted if there are control powers vested in the main EU institutions for securing the accountability of these EU agencies.

Barnard & Peers: chapter 8

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