Dr Marios Costa, Lecturer in Law, City Law School
The year 2010 saw the creation of three European Supervisory Authorities: the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority (ESMA). These authorities were established by the European Union in response to the then-unprecedented financial crisis. On January 22, 2014, the Court of Justice of the European Union (CJEU) issued a significant judgment (Case C-270/12, United Kingdom v Council & Parliament) concerning recent legislation granting ESMA the authority to impose legally binding measures on financial institutions in Member States when the proper functioning of financial markets or the stability of the EU financial system is threatened. This legal action challenged Article 28 of Regulation 236/2012, specifically regarding ESMA’s power to prohibit ‘short selling,’ a practice where shares not owned by the seller are sold to profit from a price decline.
This judgment carries broader constitutional ramifications. The ruling, which wasn’t unexpected, clarifies issues related to the powers that independent EU financial regulatory agencies can rightfully exercise. This commentary respectfully examines whether this recent decision will address the lack of accountability of these EU agencies.
ESMA can develop highly specific technical and implementing standards that the Commission later adopts under Articles 290 and 291 TFEU (related to delegated and implementing acts, respectively). For Article 290 TFEU, the Commission establishes conditions and criteria for the agency to adopt further technical regulatory measures, though the agency always drafts the measure itself. A crucial question arises regarding whether the Commission possesses the resources, technical expertise, and scientific knowledge to effectively oversee the appropriateness of the measures drafted by the agency. If the Commission chooses not to adopt the measures prepared by ESMA, it must provide justification to the agency (see Articles 10 and 15 of Regulation 1095/2010). Interestingly, the Commission operates under strict limitations. According to the preamble of Regulation 1095/2010, the Commission can only deviate from the agency’s draft measures if they conflict with EU law, violate the proportionality principle, or contradict EU financial services legislation.
Facts of the case
The UK government contested the legality of Article 28 of Regulation 236/2012, which empowers ESMA to prohibit short selling practices. The regulation was adopted based on Article 114 TFEU, allowing for harmonization measures necessary for establishing and operating the internal market. The rationale behind the regulation, particularly Article 28, is to allow ESMA to intervene and issue legally binding measures against financial institutions in Member States to prevent short selling if it threatens the proper functioning and integrity of financial markets or the stability of the EU financial system as a whole or in part. ESMA has broad discretionary authority to issue such bans and is the sole judge of whether such a threat exists.
The UK presented four arguments. First, it argued that ESMA is granted political powers involving policy choices to impose legally binding measures on financial institutions in Member States. These powers do not align with the established Meroni line of case law, which posits that delegating to autonomous bodies is acceptable as long as the Commission retains oversight to monitor the agency’s execution of its duties. Following Meroni’s reasoning, granting broad discretionary power to reconcile competing public interests to an EU agency cannot be justified based on scientific expertise. The CJEU has emphasized several times 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, along with the Commission’s delegated and implementing acts pursuant to that legislation, sufficiently restricted ESMA’s powers.
Second, the UK argued that ESMA’s power to ban short-selling violated the principle established in Romano_, which states that the EU legislature cannot delegate the power to adopt “quasi-legislative measures of general application.” The Court, however, determined that Romano did not add anything new to Meroni, particularly noting that the Treaty allows agencies to adopt measures of general application.
Third, the UK argued that Articles 290 and 291 TFEU (concerning delegated and implementing acts) were effectively exclusive, thereby ruling out the delegation of powers like the short-selling ban to EU agencies. The Court held that the Treaty (specifically, rules on judicial review) assumes that agencies can adopt binding acts, and the provision allowing ESMA to ban short selling should be considered within its overall legal context.
Lastly, the UK argued that Article 114 TFEU cannot serve as a valid legal basis for adopting the rules set forth in Article 28 of the regulation. Earlier in 2013, Advocate General Jääskinen’s Opinion concluded that the regulation should be annulled due to concerns regarding the appropriateness of the legal basis of Article 114 TFEU. He argued that ESMA’s adoption of legally binding measures addressed to Member States’ financial institutions cannot be considered harmonizing measures or uniform practices justifiable under Article 114 TFEU. The Court, however, chose not to follow the Advocate General’s non-binding opinion, ruling that Article 114 TFEU provides an appropriate legal basis for adopting Article 28 of the regulation as it aims to (a) align national law and (b) improve conditions for establishing and operating the internal market in the financial sector. On the first point, the Court cited its previous case law that specified that Article 114 could be used as a legal basis for establishing EU agencies ( Case C-217/04 UK v Council and EP) and for granting power to EU institutions to adopt legally binding acts (Case C-359/92 Germany v Council).
Comments
The Court’s judgment has considerably clarified the law concerning the delegation of powers to EU agencies. Firstly, the Meroni doctrine, while remaining in effect, does not preclude the granting of such power when the relevant legislative framework is adequately detailed. Secondly, the Romano ruling doesn’t add any new elements to Meroni. Thirdly, Articles 290 and 291 TFEU do not prevent granting powers to agencies, at least when such a grant occurs within a comprehensive legislative framework. Finally, at least the EU’s internal market powers (and arguably, by analogy, other legal bases) do not prevent delegating powers to agencies to adopt legally binding measures.
The Court’s ruling heavily emphasizes that the EU financial agencies’ adopted measures are subject to judicial review under Article 263 (4) TFEU. However, the regulatory and implementing technical standards drafted by these agencies are subject to Commission approval. Although they form the basis for the Commission’s adoption of the final act, they are technically and legally preparatory documents and, therefore, generally excluded from judicial scrutiny. Moreover, non-privileged applicants, like financial institutions adversely affected by an ESMA ban, might not satisfy the EU’s locus standi requirements. They may be excluded from direct actions under Article 263 (4) TFEU if the adopted ban still necessitates separate implementing measures as per the Telefonica judgment.
With all due respect to the ESMA judgment, the fact that ESMA’s founding regulation (Regulation 1095/2010, Articles 10(1) and 15(1)) limits the Commission’s authority to draft or unilaterally amend technical standards effectively empowers EU financial agencies to make significant political decisions involving policy choices. This judgment’s broader implications, along with the existing framework establishing these agencies, seem to suggest what has already been highlighted in the literature: “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 to consider is who bears responsibility – the Commission or the agency – when the agency’s assessment proves incorrect, leading to adverse consequences and further financial repercussions. Furthermore, according to the ESMA judgment, additional powers could be granted to agencies to adopt acts of general application that fall outside the scope of Articles 290 and 291 TFEU. The delegated and implementing acts of the Commission that detailed ESMA’s powers to adopt short-selling bans were, themselves, drafted by… ESMA. This raises important questions about ESMA’s accountability, which the Court, respectfully, seems to have overlooked.
Conclusion
This Court ruling is significant as it’s the first case addressing the powers of the newly established financial supervisory authorities. However, it also grants these authorities further powers to anticipate and ensure financial stability within the European Union. Consequently, certain constitutional questions arise: to whom are these highly independent, autonomous bodies accountable? Scientific legitimacy and the complex decision-making processes inherent in EU financial regulation cannot legitimize increasing the powers of the EU’s financial agencies. This can only be acceptable if the main EU institutions have oversight powers to ensure the accountability of these agencies.
Barnard & Peers: chapter 8