Steve Peers

Until recently, the EU courts seemed to consistently rule against the UK in cases related to financial services and opt-outs from EU law. However, a recent General Court judgment regarding the UK’s challenge to the European Central Bank (ECB) policy on securities clearing systems has defied these trends. This begs the questions: what does this mean for the UK’s financial services sector, and for the UK’s relationship with the EU?

The judgment

The UK, supported by Sweden, challenged an ECB “Policy Framework” outlining the role of the Eurosystem (the ECB and Eurozone national central banks) in payment, clearing, and settlement systems. Spain and France backed the ECB, while the Commission remained neutral. The UK opposed the framework’s stipulation that central counterparties (CCPs) handling over 5% of credit exposure for major euro-denominated products must be incorporated and controlled within the euro area. This would force a portion of London’s financial services industry to relocate to Eurozone markets.

Initially, the judgment addressed the action’s admissibility. The General Court dismissed the ECB’s argument that its Policy Framework wasn’t reviewable, deciding that its seemingly non-binding nature masked a de facto binding policy likely to be enforced by Eurozone regulators. The Court also affirmed the UK’s standing to challenge ECB actions despite its single currency opt-out.

Next, the Court addressed the case’s substance. It focused solely on one of the UK’s five arguments: that the ECB lacked the authority to regulate CCP location. (The remaining arguments involved Treaty free movement rules, competition law, non-discrimination based on nationality, and proportionality).

The ECB based its claimed regulatory power on Article 22 of its Statute, a protocol attached to the Treaties, which states that the Bank “may make regulations, to ensure efficient and sound clearing and payment systems within the Union and with other countries.” The Bank also cited Article 127(2) TFEU, which tasks it with “promot[ing] the smooth operation of payment systems,” and its overarching goal of maintaining price stability and supporting general economic policies, as outlined in Article 127(1) TFEU.

However, the Court determined that these powers only applied to “payments” in the narrowest sense – the “cash leg” of clearing operations – not the “securities leg,” since securities themselves aren’t payments. Article 22 of the ECB Statute, the Court argued, only applies to payment systems involving a clearing stage, not all clearing systems, due to the absence of any explicit reference to securities clearing. The Court also rejected the ECB’s argument of implied power, stating that such powers are only applicable in “exceptional” circumstances.

Finally, the Court proposed a “roadmap” to address the situation. Acknowledging the strong link between payment and securities clearing systems, and the potential for disruptions in one to affect the other, it suggested using Article 129 TFEU to amend the ECB Statute and expand the bank’s powers in this domain. It proposed the ECB initiate this amendment process by requesting the EU legislature to modify the Statute.

Comments

The core elements of the Court’s judgment (which could face an appeal at the Court of Justice) are persuasive. For the sake of accountability, the ECB shouldn’t be able to circumvent judicial review – which would apply to regulations issued under its Statute – by adopting quasi-mandatory “policy frameworks.” Additionally, it’s unacceptable for the ECB to implement measures affecting non-eurozone members, like the UK, while denying them the right to legally challenge these actions, especially given the Treaties’ lack of restrictions on such standing.

The Court is right to prioritize accountability by upholding that EU institutions’ implied powers should be interpreted strictly. Numerous Treaty amendments over the past three decades provided ample opportunity for Member States to define and delineate the powers of EU institutions. Without explicit power conferral, instances of implied institutional powers should be exceedingly rare.

However, the Court applies an unusually restrictive interpretation of an explicit power – the ECB’s authority to regulate “clearing and payment systems” as per its Statute. It is not inherently obvious that this solely applies to the “cash leg” of clearing, particularly considering the interdependence of payment and securities systems and the potential spillover effects of disruptions, as the Court itself acknowledges.

This crucial ruling aspect can only be grasped within the case’s broader political context. An ECB victory would likely have been misconstrued in the UK as permission to dismantle the single market for financial services, painting it as part of a broader effort by Eurozone members to undermine non-Eurozone members, particularly the UK. This would be an exaggerated response, as an ECB win wouldn’t necessarily have implications beyond securities clearance, and Eurozone members aren’t as unified as sometimes portrayed. However, it’s understandable that the judges deemed it prudent to return this contentious issue to the politicians.

It’s noteworthy, however, that the judges’ proposed roadmap for granting the ECB greater authority is remarkably straightforward. Employing Article 129 TFEU to amend the ECB Statute merely requires a Commission proposal or an ECB recommendation, followed by standard legislative procedure involving joint power for the European Parliament and a qualified majority vote in Council. Although all members have a voice, Eurozone states could outvote non-Eurozone members if they unite on this matter. The UK, then, would need to forge alliances rather than wield veto power to counter such a move. Notably, the referendum requirement in the UK’s European Union Act 2011 wouldn’t be applicable (see s. 10(1)(b) of the Act; the stipulation for parliamentary approval is moot, as the UK could be outvoted). In essence, the UK would require the support of some Eurozone members and all non-Eurozone members to block this Treaty amendment. This would entail, for example, securing support from nations like Poland, even as the UK potentially seeks to curtail the rights of Polish workers.

Alternatively, the UK could mount a legal challenge against the Treaty amendment or its implementing ECB measure, invoking its arguments regarding the internal market, competition law, discrimination, and proportionality, which the General Court judgment left unaddressed. While there are compelling arguments for the ECB and Bank of England to collaborate on effective securities clearing regulation instead of forcing the relocation of financial services from the UK to the Eurozone, it’s uncertain whether the EU courts would agree.

What broader implications does this judgment hold for the UK’s role in the EU? First, it weakens the pro-Brexit narrative that leaving the EU is necessary because Eurozone members are acting against the UK’s interests. For now, the UK has been victorious, and the possibility of a future loss remains purely hypothetical. Second, it undermines the claim that the City of London would remain unscathed post-Brexit. If this were true, why were Eurosceptics prepared to react so vehemently if the UK lost the case? In a post-Brexit scenario, the UK wouldn’t have had the same standing to sue the ECB, forcing the government or British securities firms to navigate national courts in the Eurozone to challenge the policy. Furthermore, invoking the arguments used in this case (and potentially needed in the future) might prove more difficult depending on the post-Brexit legal framework governing the EU-UK relationship.

Barnard & Peers: chapter 19