This important constitutional case of last week deals with the legal limits of the proliferation of agencies within the EU and their powers imposed by EU constitutional law, and in particular with the Meroni (1958) and Romano (1981) judgments as well as the new constitutional structure created with the Lisbon Treaty with respect to delegated and implementing powers. The case presented an opportunity for the Court, as the Advocate General had put it, ‘to balance the functional benefits and independence of agencies against the possibility of them becoming “uncontrollable centres of arbitrary power”’(para 19). The Court concluded that the fears of the United Kingdom in relation to the powers of the European Securities and Market Authority (‘ESMA’) to intervene in the financial assets and securities markets were unfounded, and by doing so clarified that articles 290 and 291 TFEU do not present a closed system of delegating regulatory powers. The judgement solidifies the legality of much of the EU’s practice in having recourse to specialized agencies to deal with issues which require a certain level of expertise. In this blog post, I will highlight the three main aspects of the judgement:
- the compatibility of the EU’s delegation of powers to ESMA with the Meroni and Romano judgments;
- its compatibility with articles 290 and 291 TFEU;
- its compatibility with the principle of conferral of powers in relation to article 114 TFEU.
Article 28 of Regulation 236/2012
In the wake of the financial crisis the EU adopted a number of instruments to supervise and regulate the European financial markets. One of them is Regulation 236/2012 which regulates short selling and certain aspects of credit default swaps. Article 28 of that Regulation gives the ESMA the power to intervene, under certain conditions, through legally binding acts in the financial markets of Member States if there is 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’. The United Kingdom – probably more concerned about what this regulation would do to its own financial industry than about issues of constitutional balance of powers – initiated proceedings to annul the Regulation based on arguments that EMSA was vested with powers that it could not have according to EU constitutional law.
Compatibility with the Meroni and Romano judgments
The first two arguments of the United Kingdom were that the powers conferred upon EMSA were contrary to the Meroni and Romano judgments. Essentially, as this case-law was understood, a delegation of power that is too broadly and insufficiently defined is prohibited (Meroni) and agencies cannot adopt normative measures (Romano). This is so for two reasons, firstly, because it would upset the institutional balance of power created by the Treaties, and secondly, because there would be a risk of lack of judicial supervision by the Court of such powers. However, the latter argument (which was important in the Romano judgment) seems to have lost force since the Lisbon Treaty explicitly permits judicial review of acts of agencies and other bodies. Moreover, ESMA was not created by private law but by the EU legislature (para 43).
In relation to Meroni the Court held that article 28 ‘does not confer any autonomous power on that entity that goes beyond the bounds of the regulatory framework established by the ESMA Regulation’ [Regulation 1095/2010] and that the exercise of those powers ‘is circumscribed by various conditions and criteria which limit ESMA’s discretion.’ The Court listed, in that respect, the various substantial and procedural limitations in place and found that those provisions were precisely delineated and amenable to judicial review in the light of the objectives established by the delegating authority. (paras 46 – 53) Therefore, the system was compatible with the Meroni judgment.
In relation to the criteria of the Romano judgment, the Court concluded that the delegation of powers was not of a quasi-legislative nature, but rather fell within the ambit of the criteria of the Romano judgment because only clearly defined executive powers were delegated. In that respect the Court noted that article 263 and 277 TFEU expressly permit EU bodies, offices and agencies to adopt acts of general application. (paras 63- 67).
Articles 290 and 291 TFEU: not a closed system
The United Kingdom had also argued that articles 290 and 291 TFEU only permit delegation of powers to the Commission, and that therefore the legislature cannot delegate powers to adopt measures of general application to agencies. The Court refuted this argument and clarified that articles 290 and 291 TFEU do not represent a closed system of delegation. The Court first pointed out that ‘while the treaties do not contain any provision to the effect that powers may be conferred on a Union body, office or agency, a number of provisions in the FEU Treaty none the less presuppose that such a possibility exists’(para 79) and referred to articles 263, 265, 267 and 277 TFEU which make clear that acts of such EU bodies are subject to judicial review by the Court.
Secondly, the Court noted the nature of the decisions made by ESMA was very different of the situations defined in articles 290 and 291 TFEU (paras 82-83). It held that article 28 of the regulation ‘vests ESMA with certain decision-making powers in an area which requires the deployment of specific technical and professional expertise.’ The Court therefore held that
Article 28 of Regulation No 236/2012 cannot be considered in isolation. On the contrary, that provision must be perceived as forming part of a series of rules designed to endow the competent national authorities and ESMA with powers of intervention to cope with adverse developments which threaten financial stability within the Union and market confidence. To that end, those authorities must be in a position to impose temporary restrictions on the short selling of certain stocks, credit default swaps or other transactions in order to prevent an uncontrolled fall in the price of those instruments. Those bodies have a high degree of professional expertise and work closely together in the pursuit of the objective of financial stability within the Union.
Therefore, Article 28 of Regulation No 236/2012, read in conjunction with the other regulatory instruments adopted in that field identified above, cannot be regarded as undermining the rules governing the delegation of powers laid down in Articles 290 TFEU and 291 TFEU. (paras 85-86)
Breach of article 114 TFEU
Lastly, the Court rejected the argument that the Council and Parliament had acted ultra vires because article 28 of the regulation could not have been adopted on the basis of article 114 TFEU (the legal basis for the harmonising rules to establish an internal market). The UK had argued that article 114 TFEU does not permit the legislature to take individual decisions, but only measures of general application. The Court recalled that a legislative act must fulfil two conditions in order for it to be adopted on the basis of article 114 TFEU. Firstly, it must comprise measures for the approximation of the provisions laid down in rules or actions in the Member States. Secondly, the act must have as its object the establishment and functioning of the internal market.
As regards the first condition, the Court recalled that ‘by the expression ‘measures for the approximation’, the authors of the FEU Treaty intended to confer on the Union legislature, depending on the general context and the specific circumstances of the matter to be harmonised, discretion as regards the most appropriate method of harmonisation for achieving the desired result, especially in fields with complex technical features’(para 102). Therefore, the legislature may for that reason establish a body responsible for the implementation of harmonization in particular if it requires specific professional and technical expertise. And although article 114 TFEU is not a legal basis for measures that are legally binding on individuals, ‘in certain fields, the approximation of general laws alone may not be sufficient to ensure the unity of the market.’ It therefore concluded that ‘the concept of ‘measures for the approximation’ of legislation must be interpreted as encompassing the EU legislature’s power to lay down measures relating to a specific product or class of products as well as, if necessary, individual measures concerning those products.’ (para 106)
With regard to the second condition, the Court was briefer. It held that the regulation’s purpose was to improve the conditions for the establishment and functioning of the internal market, and more specifically the financial markets as the common regulatory framework laid down rules relating to short selling and credit default swaps as well as rules to ensure greater coordination and consistency between Member States where measures have to be taken in exceptional circumstances. Consequently, ‘the harmonisation of the rules governing such transactions is intended to prevent the creation of obstacles to the proper functioning of the internal market and the continuing application of divergent measures by Member States.’ (paras 113-114) The Court added that ESMA’s activities in particular related to reacting to market behaviour with cross-border implications (which national authorities alone could not resolve) threatening the integrity of financial markets or the stability of the financial system (para 115).
The Court was in this case probably not really confronted with an ‘uncontrollable centre of power’ considering the procedural and substantive checks and balances imposed in the regulation as well as the possibility of judicial review by the Court and therefore did not see the need to annul a regulation that itself tried to curb an uncontrollable centre of power: the financial markets. As such, the judgment is an important legal recognition of the EU’s approach of instituting various agencies for highly technical matters and clarified that articles 290 and 291 TFEU do not present a closed system of delegating regulatory powers, no doubt to the disappointment of opponents of this ‘agencification’. See for further comment also Kenneth Armstrong’s post at Eutopialaw.