Steve Peers
Until yesterday, two trends
seemed consistent in the jurisprudence of the EU courts. First of all, the UK
kept losing cases relating to the interests of its financial services industry:
on short-selling (discussed here), the financial transactions tax (discussed here)
and bankers’ bonuses (discussed here). Secondly, the UK kept losing cases
concerning its opt-outs from EU law (for instance, on social security and the
immigration opt out, see here).
However, yesterday’s judgment
of the EU’s General Court on the UK’s challenge to the European Central Bank
(ECB) policy on securities clearing systems bucks both trends. What are its implications for the UK's financial services industry, and for the UK's relationship with the EU?
The judgment
The UK challenged a ‘Policy
Framework’ published by the ECB, which set out the role of the ‘Eurosystem’
(the ECB and the national central banks of Eurozone states) as regards payment,
clearing and settlement systems. Sweden supported the UK, while Spain and
France supported the ECB; the Commission stayed neutral. The UK objected to the
Policy Framework provisions which stated that any central counterparties (CCPs)
that held more than 5% of the credit exposure for one of the main
euro-denominated product categories had to be legally incorporated and fully
controlled from within the euro area. This would inevitably mean that a portion
of the financial services industry which was traditionally located in the City
of London would have to move to one or more Eurozone financial markets instead.
First of all, the judgment
examined the admissibility of the action. The General Court rejected the ECB’s
argument that its Policy Framework was not a reviewable act, ruling that
despite its apparent soft law form it would perceived as a de facto binding
policy and would be applied by Eurozone regulatory authorities in practice. Also,
the Court ruled that the UK had standing to bring a legal action against acts
of the ECB, despite its opt-out from the single currency.
Secondly, the Court ruled on the
substance of the case. It was only necessary to rule on one of the UK’s five
arguments against the validity of the Policy Framework: that the ECB lacked
competence to adopt a measure on the location of CCPs. (The other arguments
concerned Treaty free movement rules, competition law, non-discrimination on
grounds of nationality and proportionality).
The ECB had claimed a power to
regulate on the basis of Article 22 of its Statute, which takes the form of a
Protocol attached to the Treaties, and states that the Bank ‘may make
regulations, to ensure efficient and sound clearing and payment systems within
the Union and with other countries’. Also, the Bank referred to Article 127(2)
TFEU, which gave it the task ‘to promote the smooth operation of payment
systems’, and the ECB’s general objective of maintaining price stability and supporting
general economic policies, as set out in Article 127(1) TFEU.
In the Court’s view, however,
these powers only extended to the ability to regulate ‘payments’ in the narrow
sense, ie the ‘cash leg’ of clearing operations, not the ‘securities leg’, since
securities do not in themselves constitute payments. Article 22 of the ECB
Statute could only apply to payment systems with a clearing stage, rather than
all clearing systems, in the absence of any explicit reference to the clearing
of securities. The Court also rejected the ECB’s argument that it had an implied
power to regulate such issues, since such implied powers only existed ‘exceptionally’.
Finally, the Court concluded by
sketching out (in effect) a ‘roadmap’ to change the current situation. Acknowledging
that there are ‘very close links’ between payment systems and securities
clearance systems, and that disturbances affecting securities clearance can
affect payment systems, it stated that Article 129 TFEU could be used to amend
the relevant provisions of the ECB Statute to extend the Bank’s powers in this
field. So it suggested that the ECB could trigger that amendment process by
requesting the EU legislature to amend the Statute.
Comments
The essential elements of the
Court’s judgment (which could still be appealed to the Court of Justice) are
convincing. From the perspective of accountability, the ECB should not be able
to adopt ‘policy frameworks’ with quasi-mandatory language that will likely be
applied in practice, as a means of evading the judicial review that would
certainly apply if it adopted those rules (as its Statute specifies) in the
form of regulations. Nor is it acceptable that the ECB could adopt measures
with an impact on non-eurozone Member States and deny those countries standing to
sue it, especially when the Treaties (as the Court pointed out) contain no
limits on such standing.
As for the substance of the case,
the Court is surely right, in the interests of accountability, to say that EU
institutions’ implied powers have to be interpreted narrowly. There have been
five major Treaty amendments in thirty years, and so there have been plenty of
opportunities for Member States to decide what powers ought to be conferred
upon EU institutions, and what powers should not. In the absence of an express conferral
of power, the cases where the institutions have implied powers should be very
exceptional indeed.
However, the Court takes an
unusually narrow approach to the interpretation of an express power, namely the possibility for the ECB to regulate ‘clearing
and payment systems’ as set out in its Statute. It is not self-evident that
this provision can only apply to the ‘cash leg’ of clearing systems, especially
in light of the links between payment and securities systems, and the impact of
disturbances affecting securities clearance, which the Court expressly
acknowledges.
This key aspect of the ruling can
only be understood in light of the broader political context of this case. If
the ECB had won, that result would have been widely regarded in the UK as a carte blanche for the ECB to split up
the single market in financial services, as part of a broader ‘ganging up’ of Eurozone
Member States against non-Eurozone Member States, in particular the UK. This
would have been a rather hyperbolic reaction, since an ECB victory would not
necessarily have had an impact beyond the specific issue of securities
clearance, and the Eurozone Member States do not gang up as easily as is
sometimes imagined: witness the current relationship between Greece and
Germany, for starters. Nevertheless, it’s no wonder that the judges believed it
would be wiser to hand this hot potato back to the politicians.
It’s striking, though, that the
judges’ roadmap to give the ECB more powers is particularly easy to follow. The
use of Article 129 TFEU to amend the ECB Statute only requires a proposal from the
Commission or a recommendation of the ECB, followed by the ordinary legislative
procedure, entailing joint power for the European Parliament and a qualified
majority vote in Council. Although all Member States would have a vote,
Eurozone States (if they do gang up together on this point) can now outvote
non-Eurozone States. The UK would have to
seek alliances, rather than threaten vetoes, to block such a move. The referendum
requirement in the UK’s European Union Act 2011 wouldn’t apply (see s. 10(1)(b) of
the Act; the requirement for parliamentary approval there is meaningless, since the UK could be outvoted). Indeed, the UK would need the backing of some Eurozone States, as
well as all non-Eurozone States, to block such a Treaty amendment. This would entail,
for instance, securing the support of countries like Poland, at the same time
as the UK (whichever of the two largest parties forms the biggest part of
government after the next election) seeks to cut back the rights of Polish
workers.
Failing that, the UK could bring
a legal challenge to the Treaty amendment, or the ECB measure implementing it, invoking
again its arguments concerning the internal market, competition law, discrimination
and proportionality, which were not addressed in the General Court’s judgment.
There’s a strong case to be made that the valid objective of regulating
securities clearance effectively could be ensured by collaboration between the
ECB and the Bank of England, rather than forcing some part of the financial services industry
to move from the UK to the Eurozone, but the UK could not count on the EU courts accepting it.
What are the broader implications
of this judgment for the UK’s role in the EU? First of all, it weakens the
pro-Brexit argument that ‘we should leave the EU because the Eurozone Member States
are ganging up on us’. For now, the UK has won this battle, and it’s only a hypothetical
possibility that it will lose the war later on. Secondly, it weakens the argument
that ‘the City of London would be perfectly fine after Brexit’. If that were true,
then why were Eurosceptics poised to make an unholy fuss if the UK had lost
this case? Indeed, if the UK were not in the EU, it would not have had the
privileged standing to sue the ECB, and the government (or British securities
firms) would have had to go through national courts in the Eurozone to
challenge this policy instead. Moreover, it might be harder to invoke the other
arguments which the UK made in this case (and would have to make in future),
depending on what legal arrangements governed the EU/UK relationship after
Brexit.
Barnard & Peers: chapter 19
