POST-CRISIS reforms in the regulation and supervision of financial markets have led to increasing centralisation of powers at EU level. A prominent example is the powers of the European Securities and Markets Authority (ESMA) under Article 28 of Regulation No 236/ 2012 (OJ 2012 L 86 p. 1) (“Short-Selling Regulation”) to prohibit or impose conditions on short-selling or similar transactions, or require notification or public disclosure of net short positions. These powers were challenged by the UK before the Court of Justice of the European Union (CJEU) in Case C-270/12, United Kingdom v European Parliament and Council [2014], Judgment of 22 January 2014, not yet reported.
The UK alleged that the Article 28 powers were contrary to EU law on four grounds: (1) the large margin of discretion and the wide range of measures at ESMA's disposal, as well as the subjective nature of the factors that ESMA could assess, went beyond “clearly defined executive powers” which could be lawfully delegated to EU agencies under the Meroni doctrine (Case 9/56, Meroni v High Authority [1957–1958] ECR 133); (2) ESMA's powers amounted to quasi-legislative measures of general application contrary to Romano (Case 98/80, Giuseppe Romano v Institut national d'assurance maladie-invalidité [1981] ECR 1241); (3) Article 28 conferred on ESMA powers which could only be delegated to the Commission under Articles 290–291 of the Treaty on the Functioning of the European Union (TFEU); (4) Article 114 TFEU was not an appropriate legal base for the conferral of Article 28 powers, which went beyond harmonisation of national measures in the internal market.
In its landmark judgment, the CJEU rejected all four claims of the UK. Regarding the Meroni doctrine, the Court ruled that Short-Selling Regulation Article 28 does not exceed the scope of powers delegable to agencies because its application is limited by restrictive conditions and criteria. In particular, measures under Article 28 can only be taken if they address a threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system in the Union, and if there are cross-border implications and no competent authority has taken adequate measures to address the threat. Further, ESMA is required to assess a number of specific factors, it can only take the measures specified in Article 28, and it must consult and notify other authorities (notably, the European Systemic Risk Board).
The CJEU went on to dismiss the second and third arguments of the UK. According to the Court, the adoption of acts of general application by ESMA is expressly permitted by Articles 263 and 277 of TFEU, and is not contrary to Romano. Further, Articles 290 and 291 TFEU do not prohibit the delegation of powers to agencies, and in fact Articles 263, 267 and 277 TFEU presuppose that such delegation is possible. The Court emphasised that Article 28 of the Short-Selling Regulation should not be viewed in isolation, but as part of a broader framework of financial stability measures.
Finally, the Court held that Article 114 TFEU is an appropriate legal base for Article 28 of the Short-Selling Regulation. According to the Court, Article 28 constitutes a measure for internal market harmonisation, because it is intended to harmonise diverging short-selling monitoring measures among member states, and to eliminate obstacles to the functioning of the internal market. On this point, the Court did not follow the opinion of its Advocate General, Niilo Jääskinen, who concluded that ESMA's powers under Article 28 involved the substitution of national decisions, rather than harmonisation measures, and therefore that Article 114 TFEU was not an appropriate legal base.
Two issues of fundamental importance should be distinguished with regard to the judgment of the CJEU. The first is the updated Meroni doctrine. The Meroni doctrine had been understood as distinguishing between clearly defined executive powers, which are delegable to agencies, and discretionary powers implying a large margin of discretion, which are not. In the present judgment, the Court updated the Meroni doctrine, by ruling that delegation of discretionary powers to agencies is permissible, as long as adequate controls are in place, such as specific criteria and conditions and judicial review under Articles 263 and 277 TFEU. The Court also clarified that delegation of powers to agencies can operate independently of Article 291 TFEU, and so without the need to delegate powers to the Commission or to involve control mechanisms which engage the Council and Parliament. The Court's ruling is a welcome development in that it sheds light on the long-running debate about the delegation of powers to EU agencies. The modernisation of the Meroni doctrine and the expansion of powers delegable to agencies arguably reflect the current stage of evolution of the EU, where agencies are acquiring an increasingly important role in promoting integration across a broad range of areas. At the same time, the need to protect democratic legitimacy and institutional balance in the EU suggests that the expansion of agencies’ powers should not be left without control mechanisms.
The second key issue is the scope of Article 114 TFEU. The Court ruled that the Article 28 powers constitute (1) approximation measures because they create a common Union framework in an area of divergence between member states (monitoring of short-selling); and (2) internal market measures because they are necessary for the proper functioning of the internal market. While these arguments carry considerable strength, the Court's reasoning is not beyond criticism. It is arguable that by relying mainly on the wording of the Short-Selling Regulation itself to assert compliance with Article 114 TFEU, the Court failed to exercise scrutiny on the substance of Article 28. Further, the Court's wide interpretation creates the risk that the scope of “harmonisation measures” could be expanded almost indefinitely, depriving Article 114 TFEU of its inherent limits, and thus stretching the principle of legality and the compliance of EU legislation with the principle of conferral. This concern is reflected in the Advocate General's attempt to set limits on what constitutes “harmonisation”.
Notwithstanding the above criticisms, it must be acknowledged that the Court's judgment is of paramount importance and has wide-ranging implications beyond the subject matter of this particular case. The Court's judgment is pivotal for the entire European System of Financial Supervisors (ESFS). All three European Supervisory Authorities (ESAs) are EU agencies with extensive direct intervention powers. These direct intervention powers include not only the power to prohibit or restrict financial activities in certain cases which gave rise to the powers considered in the present judgment, but also powers concerning breaches of EU law, emergencies and binding mediation. By upholding the legality of ESMA's direct intervention powers under Article 28 of the Short Selling Regulation, the Court granted a strong protection to the ESAs’ direct intervention powers from challenges on similar grounds. For example, a pending challenge against the powers of the European Banking Authority (EBA) regarding variable remuneration of certain employees of financial institutions (Case C-507/13, UK v European Parliament and Council (OJ 2013 C 359 p. 4)) now appears to have less prospect of success, at least on the grounds of inadequate Treaty legal base and ultra vires delegation of powers to the EBA. Going even further, the Court's judgment could open the door for the delegation of more extensive powers to ESAs, for example in the forthcoming review of the ESFS.
The Court's judgment acquires additional significance in the light of the Banking Union. Critically, the Single Resolution Mechanism (SRM) is framed around a new EU agency based on Article 114 TFEU, the Single Resolution Board (SRB). The SRB's powers will be very broad and sensitive in nature, including the power to decide on resolution tools and on the use of the Single Resolution Fund. By expanding the powers delegable to agencies and the scope of Article 114 TFEU as a legal base, the Court's judgment increases legal certainty around the SRM and in particular the SRB, and reduces the risk of future legal challenges.
To conclude, the decision of the Court comes as a relief with regard to the new institutional architecture of EU financial regulation, supervision and resolution. The judgment increases legal certainty around ESMA, the other ESAs and the SRB, and shields against future legal challenges on similar grounds. It modernises the Meroni doctrine and brings it in line with the EU's current institutional architecture. At the same time, the judgment re-confirms the view that the Court will be very reluctant to strike down mechanisms put in place to safeguard financial stability, even if this means stretching the existing legal framework (see also Case C-370/12, Thomas Pringle v Government of Ireland, Ireland and the Attorney General, not yet reported, noted [2013] C.L.J. 237). However, such an approach calls for caution. Meroni should not be altogether deprived of its legal effect, as it constitutes a safety valve for institutional balance among EU institutions and with member states. Also, the principle of legality suggests that Article 114 TFEU should not be infinitely expanded to cover all measures relating to the internal market. The above concerns illustrate the core underlying problem: the lack of a robust Treaty base for the post-crisis reforms in financial regulation, supervision and resolution. While the Court's judgment is to be welcomed, in the absence of Treaty change, it only comes as a second best solution.
