The EU Single Market Information Tool: The European Commission’s new investigative power in 2018
By Gianni De Stefano and Jaime Rodríguez-Toquero
The European Commission is about to gain a new investigative power through the Single Market Information Tool (SMIT). The SMIT will allow the Commission to request information (including factual market data or fact-based analysis) from private firms or trade associations when the Commission initiates or substantiates infringement proceedings against one or more Member State(s) that may have failed to fulfil an obligation under the applicable Single Market legislation. This post will discuss the background of the SMIT, its purported rationale, and critically reflect on the powers granted to the Commission under the SMIT.
The Commission is at pains to clarify that the SMIT initiative does not aim to create new enforcement powers allowing it to pursue infringements of Union law in the Single Market area against individual market participants. That said, the Single Market rules can be infringed by either Member States or private companies. Therefore, companies responding to such information requests will not only incur administrative and financial burdens, but they will also have to be careful not to incriminate themselves in doing so, as we will see below.
Over the past years, the European Commission – in its role as “guardian of the Treaties” set out in Article 17 TEU (available here) – has struggled to access reliable information about the conduct of market participants in order to enforce Single Market rules. Its “guardian” role is exercised mainly through the infringement procedure applied to Member States where they may have failed to fulfil an obligation under the Treaties, as set out in Article 258 TFEU (statistics on the Single Market infringement proceedings are available here). A previous Commission Impact Assessment Report (available here) explained how the lack of reliable and accurate firm-level information available to the Commission and Member States creates a problem in situations where access to such information is needed to enforce Single Market rules in a timely manner.
Obtaining such evidence is challenging, particularly in those cases with a cross-border dimension. This is so for a number of reasons: the required evidence is detailed and often comprises sensitive firm-level information which is not publicly available and cannot be purchased from third party data providers; the required information may be available to national authorities in only some Member States; or the collected information is often not comparable across Member States. Given these challenges, private firms are considered to be the only feasible source of information.
The SMIT will be used by the Commission as a last resort measure when all other means to obtain information have failed. Thus, it will be used only for those cross-border cases where national intervention would not be successful, due to its scale or effects, and the EU would be better placed to act.
The SMIT, on the other hand, does not deprive Member States of their important role, alongside the Commission, in applying rules in the field of the Single Market or other related areas. The Member States will continue to have their own investigative powers and will remain free to extend them (to the extent permitted under EU and/or national law). The operation of this Regulation will involve Member States in various instances, for example through the notification of information requests to the Member States concerned and through the sharing of information between the Commission and Member States, thereby reflecting the principle of sincere cooperation between the Commission and Member States set out in Article 4(3) TEU (available here).
The SMIT is designed to apply to the Single Market in its broad sense: a functional area without internal frontiers where goods, people, services and capital circulate freely. It will affect a wide range of industries including consumer goods, financial services, telecommunications, transport, environment, energy, agriculture and fisheries.
The SMIT relies on the experience of the Commission in the competition law field, where its extensive powers to request information from companies help it to gather robust information for the enforcement of competition rules. However, the application of the SMIT will be much broader.
Whilst the European Parliament report on the Commission’s proposed Regulation (available here) is to be adopted in the course of 2018, and the EU legislators are to decide on the current draft amended by the European Parliament (available here), the SMIT remains an EU priority for the current Commission (see for example the letter of intent accompanying Commission President Jean-Claude Juncker’s ‘State of the Union’ speech, available here).
1. Background: the EU Single Market and its rules
The concept of the Single Market entails the EU being one territory without any internal borders or other regulatory obstacles to the free movement of people, services, goods and capital. However, at times the benefits of the Single Market may not materialise because Single Market rules are not known or implemented or because they are undermined by other barriers. For example, through its public consultation (available here), the Commission has identified barriers such as price discrimination based on residency, restricted access to online audio-visual content while abroad, and the impossibility of delivering online purchases to certain countries.
In cases where Member States do not respect their obligations under EU law, the Commission can take legal action against them in the form of infringement proceedings before the Court of Justice under Article 258 TFEU. Member States are usually the Commission’s primary source of information. However, in certain circumstances, they may not be of much help (for example in cross-border cases), whereas private companies may have the relevant information and evidence for the Commission to prove the existence of severe restrictions to the functioning of the Single Market. Hence, the SMIT proposal.
2. How the SMIT will work
The proposed Regulation will grant the Commission substantial new powers to request information from companies in the EU. It marks an important development as it seeks to introduce a tool that would allow the Commission to request information – including confidential and market sensitive information – from firms in different sectors whenever necessary to protect the Single Market. In particular, the Commission will be empowered to request information from companies or trade associations (see Article 4). This power can be exercised where there are “serious problems with the establishment and the functioning of the internal market by means of infringement procedure”. In other words, the Commission will be able to send information requests to companies or trade associations only in the context of initiating or substantiating infringement procedures. This limitation was proposed by the European Parliament in its last round of amendments to avoid a disproportionately frequent use of the power.
Information which is likely to be sought from companies or trade associations may consist of, for example, factual market data (market size, geographical distribution of customers and suppliers), firm data (cost structure, pricing policy, volumes, supply contracts, product or service characteristics) or data relating to the overall functioning of the Single Market, such as in relation to perceived regulatory and entry barriers or cross-border operation costs (i.e., fact-based analysis).
The Commission shall only use its powers to request information “as a measure of last resort” if the information sought (i) is not publicly available or available from other channels at the Commission’s disposal; and (ii) has not been provided by a Member State, company or citizen. In addition, the Commission must adopt an explanatory decision prior to using the power, stating its intention to use the power, explaining the suspected serious problem with the establishment and functioning of the Single Market which has a cross-border dimension, the information sought, why such information is needed, why other means to obtain such information failed (including a list of the institutions and sources consulted) and the criteria for selecting the addressees of the requests (which cannot be micro-companies). Such an explanatory decision should be addressed to the Member State(s) concerned (see Article 5).
Once the Commission has adopted its explanatory decision, it may, by simple request or by a subsequent decision, require companies or trade associations to provide information (see Article 6).
An information request by “decision” (as opposed to a “simple request”) can be addressed only to “large” companies (i.e., with above 250 employees, as per the EU definition available here) and trade associations, may entail fines in the form of period penalty payments, and can be challenged before the Court of Justice of the EU.
“Micro-companies” (i.e., with less than ten employees, as per the EU definition available here) are exempted from this proposal in order to avoid imposing a disproportionate administrative burden on them, considering in particular that they are unlikely to be in a position to provide sufficiently relevant information.
The companies and trade associations that are addressees of the Commission’s information requests must reply on time and in a complete, accurate, and non-misleading manner (see Article 7). The Commission is empowered to impose sanctions in the form of periodic penalty payments (maximum 5% of the average daily turnover concerned in the preceding business year for each working day of delay) if a respondent supplies incorrect or misleading information or if, in response to a request made by a formal Commission decision, it provides incomplete information or the company does not respond at all (see Article 9).
Companies are to provide information that is already at their disposal, thereby incurring no or limited costs (see Article 5), and they have the right to demand that the request be withdrawn in cases where the company does not possess the information or where the costs for processing and compiling the information would be disproportionate (Article 6). Such provisions were proposed by the European Parliament to avoid the new procedure becoming a burden for companies in the EU.
The Commission must forward the answers it receives from companies to the Member State concerned by the request where the answers are relevant to a formal EU infringement procedure against that Member State (see Article 7). In cases where an answer includes information that is confidential to the company providing it, the Commission shall only forward the non-confidential version of the submission to the Member State concerned.
The use of the information collected by the Commission can only be used for the purpose of addressing serious problems with the establishment and the functioning of the Internal Market (see Article 8). The use of such information for other purposes, in particular for the application of EU competition rules, is explicitly excluded in the proposed Regulation (see both the Commission’s Explanatory Memorandum and Recital 14).
3. The Commission will have a broad power of investigation
The Commission currently does not have a general investigative power of its own to help it enforce Union law in the area of the Single Market. The existing investigative powers of the Commission are sectorial and related to the antitrust, merger control or State aid rules (see the relevant EU regulations here, here and here, respectively). There is little doubt that the proposed new Regulation will significantly increase the Commission’s ability to detect and investigate breaches of EU law.
As to its scope of application, the SMIT will allow for better enforcement of Single Market rules and principles (free movement of goods, services, persons and capital and non-discrimination on grounds of citizenship/origin) with regard to, for example, agricultural products, the transport sector (the EU infringement scoreboards, available here, often refer to cases of transport safety and security), or the energy sector (the Energy Union is one of the pillars of the current EU Commission) among others. Not only will the SMIT contribute to the development and functioning of economic sectors where common EU policies have already been established (such as the common agricultural policy, common transport policy, Union policy on energy), but it will also affect fast-moving markets, new economic activities and new business models, all of which are relevant to today’s Digital Single Market, also known as the Single Market 2.0.
In its Impact Assessment (available here), the Commission includes a list of cases where, in the context of infringement proceedings against Member States, it could have usefully tried to obtain missing factual evidence from market participants in a number of sectors (energy, transport, insurance) touching upon various Single Market rules such as: regulation of network industries, free movement of capital in relation to tax issues, freedom of establishment, freedom to provide services and public procurement procedures. In all these cases the Commission lacked sufficient relevant firm-level information which could have been provided by a private party (businesses), had the Commission had investigative powers such as those envisioned by the SMIT.
Importantly, companies (and not only Member States) may infringe certain EU Single Market rules, and therefore end up in a situation where their responses to information requests could (possibly) be indirectly used against them at the EU level and/or at the Member State level. For instance, companies may infringe EU rules on parallel trade (i.e., restricting the import of certain products into one Member State from another Member State, see the sectorial 2017 EU regulation, where parallel trade is referred to, available here), or geo-blocking (i.e., any restrictions imposed by online shops based on nationality, place of residence, or place of connection, see the new EU regulation which should come into force later this year available here).
One of the pitfalls of the proposed SMIT Regulation is that it fails to provide a protection against self-incrimination for companies. The right against self-incrimination operates such that one should not be obliged to produce evidence against oneself. As a criminal law principle, this right is mostly applicable in the context of procedures against individuals. Nevertheless, companies are also considered to have such a right, as confirmed by the Court of Justice in the Orkem judgment (available here). The protection against self-incrimination derives from the right to a fair trial and the presumption of innocence enshrined in Article 6 of the European Convention on Human Rights and Articles 47 and 48 of the Charter of Fundamental Rights of the EU. Although the proposed Regulation explicitly excludes the use of the information obtained for the application of competition rules, its failure to explicitly recognise the right against self-incrimination presents a significant risk for companies.
The balance of EU powers, Member State powers, and EU company stakes is set to change with the introduction of the SMIT in 2018. Watch this space.