Issue 3 March 2015
WMA JOURNAL In this issue
Financial Crime Technology The EU Managing Change
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PartThree: Unintended Consequences? Establishing EU Liability In recent months we have seen media coverage relating to the punitive fines being imposed on financial institutions for regulatory infringements, banks finding ways to circumvent rules relating to bonuses and the UK Government taking the EU Commission to court over this very issue. At the same time a growing number of leading financial figures in the City are voicing their concerns about the sheer volume of financial legislation being churned out by the Brussels bureaucracy. Chief amongst these exponents has been HSBC’s Chairman, Douglas Flint, who has warned about the growing dangers of disproportionate risk aversion as individuals, fearing the zero tolerance climate that permeates the regulatory landscape, seek to protect themselves. As one practitioner recently confided to me “we are like rabbits caught in the headlights”. Meanwhile Lloyd’s chief executive, Antonio Horta Osorio, has been reported as saying that he worries that practitioners will spend more time creating a paper trail rather than focusing on customers, whilst the BBA is pushing our government to do more to stem this tide of regulation which the BBA fears is having serious unintended consequences. In my previous two articles I presented the results of my on-going research into the unintended consequences caused by EU financial services regulation. This led me to question whether they did in fact facilitate the 2007/2008 financial crisis. I arrived at this by analyzing the negotiations that led to the Investment Services Directive (ISD), its successor the Markets in Financial Instruments Directive (MiFID) and the subsequent unintended consequences these directives caused. The results of this research were presented in my first article which appeared in this publication in the autumn of 2013. I subsequently followed this up with a second article which appeared in the spring of last year, covering my analysis of the demise of the Northern Rock Bank in which I deduced that EU directives and regulations were complicit in the resulting fiasco which heralded the 2007/2008 financial crisis here in the UK. In both of these cases I concluded that there is both compelling as well as persuasive evidence that the resulting unintended consequences could have been foreseen.
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I now pose the following legal hypotheses. If EU financial regulations cause unforeseen consequences and intent is given a broad definition to include events that are highly likely, then, if these unintended consequences could be shown to have been foreseeable, would not the inevitable conclusion be that they are not unintended but intended consequences? If so, what liabilities arise under EU law and could the legal application of the common law concepts of intention and foreseeability be applied in order to establish possible cause of action against the EU?
law relating to civil wrongs such as negligence).
In this article I present an overview of my latest research in which I consider the three main elements required before an action for damages can proceed against the EU. In doing so I consider the viability of seeking redress from the EU via the courts by analyzing how, if at all, we could construct a hypothetical action for damages or loss1 against an EU institution.
It is to be noted at the outset that the definition of EU institution extends beyond the definition given in Article 7(EC). For example, Community related bodies such as the European Central Bank (ECB) and the European Securities and Markets Authority (ESMA) also fall under the general ambit of the definition of EU institution where it concerns liability matters. Let us therefore assume hypothetically that we are contemplating to bring an action for damages against one of these institutions as I work through the various elements.
Elements for Action Let me first turn to the three main elements required before an action for damages can proceed. In essence we must first establish that a wrong has been committed by the EU, secondly that the claimant must have suffered some form of damage and thirdly that there is a causal link between the two. These elements follow a similar pattern to those with which we are familiar under English tort law (the
Under Articles 235 and 288 EC the EU is liable, at least in principle, for any damages that the EU’s institutions, employees or agents cause as a consequence of performing their duties. Action for damages can therefore be brought against the EU institution deemed to be at fault or for damages caused by its employees, in which case the EU is also liable by way of vicarious liability (refers to a situation where someone is held responsible for the actions or omissions of another person). Establishing Fault
Considering the first component, it is inherent that there must be some fault by the EU institution and/or employee before an action may be considered. Under Article 288(2) there is no strict liability2 (Strict liability is the legal responsibility for damages, or injury, even if the person found strictly liable was not at fault or negligent).
1. For the remainder of this article I will use the term damage to mean damages or loss 2. Douglas-Scott, S, Constituional Law of the European Union, Harlow, UK. Pearson, 2002 at P.389 3. Case 5/71 Aktien-Zuckerfabrik Schoppenstedt v Council [1971] ECR 975 4. Douglas-Scott, S, Constituional Law of the European Union, Harlow, UK. Pearson, 2002 at pp.394-400
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We are like rabbits caught in the headlights
I have also considered the scope given by the European courts to the definition of “wrongful act” by evaluating administrative acts, negligent acts by EU employees and liability arising from the adoption of wrongful acts having legal effects by reviewing the relevant case law. I have found that generally the courts apply a restrictive approach as to what constitutes a ‘wrongful act’. Concerning the adoption of legislative acts, my investigation found that the absence of an annulment (in this context a judgment by a court which retroactively invalidates a legislative act to the date of its formation) does not preclude a subsequent action under Article 288. However, this does not mean that actions arising are in the main successful. In fact an analysis of the case law indicates that the Court of Justice of the European Union (CJEU) is very restrictive in the test that it has formulated the ‘Schoppenstedt’ formula3 (so called as it was developed in the 1971 case of Aktien-Zuckerfabrik Schoppenstedt v Council) in order to establish EU liability for legislative acts. The ‘Schoppenstedt’ formula contains three main elements which must be met in order to establish liability: 1. the legislative measure in question involves choices of economic policy 2. there has been a breach of law relating to the protection of the individual and 3. the breach has been sufficiently serious.4
for liability to be established “ intheorder damage must be deemed to
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be conclusive, specific and measureable.
Therefore in order to clear the way for our hypothetical action for damages to succeed we must be able prove that the legislative measure in question involved choices of economic policy. For example, did the regulation relate to a choice of economic policy? Could we, for example, argue that CRD IV did involve a choice of economic policy as it relates to consumer protection but has arguably resulted in increased costs and market contraction leading to loss of opportunity and ultimately to increased costs and less choice for consumers? Could we argue that MLD III (the 3rd Money Laundering Directive) has resulted in a breach of law relating to the protection of the individual given the broad nature of surveillance being undertaken ostensibly to protect against criminal and terrorist activities? And finally has this breach been sufficiently serious? The latter, as we can see, involves an element of subjectivity which makes for uncertainty of outcomes. Given the above we begin to see the complexities of constructing a case against an EU institution. Establishing Damage and Causation I now turn to the other two elements required in order to bring an action under Article 288, damage and causation. The first point to note is that the term ‘damage’ is not define in the EU Treaties. This would point towards a broad interpretation
of what constitutes ‘damage’ by the courts but, here too, like their treatment of ‘wrongful act’, which I covered earlier, the courts have tended to take a restrictive approach. This means that once again the courts make it difficult to bring an action against an EU institution. Generally, in order for liability to be established the damage must be deemed to be conclusive, specific and measureable. However, an examination of the case law would indicate that the courts can at times relax these requirements as in Kampffme er [1967]5 where it found that the EU may be liable if the loss can be ascertained to be “imminent and foreseeable with suffici t certainty”.6 From a hypothetical perspective my research would indicate a strong case could be made concerning “foreseeable with suffici t certainty” where it concerns the first apital Adequacy Directive, the Investment Services Directive as well as in the Northern Rock case. The question of “imminent” could however prove more problematical. An examination of the existing case law also indicates that the courts will award damages for economic loss but there is a general duty on the claimant to mitigate against loss. Therefore, if the claimant cannot demonstrate to the Court that it did mitigate against loss, the action will most likely fail. In other words if you would have to demonstrate what measures you took to avoid loss. Most importantly the duty to prove damages lies with the claimant who must provide both irrefutable and corroborative evidence to the
courts.7 Turning to the third and final element, causation, EU case law also indicates that the courts apply a narrow interpretation employing a restrictive approach and issuing clear guidelines. For example the courts expect evidence that shows that any damage caused be of a sufficiently direct consequence for a wrongful EU action. EU Law is frequently implemented at national level, for example, via statutory instruments under English Law, the question therefore arises as to which forum, that is which court, are claimants to use for litigation. Should they, for example, bring their actions in the English courts? In order to attempt to answer these questions I have evaluated EU case law such as Toepfer8, Kampffmeyer9 and Haegeman10, Professor DouglasScott11, from the University of Oxford’s faculty of Law, tentatively concludes that where it concerns concurrent liability (the principle that multiple defendants can be liable for the same damage) then, if the claimant is seeking the return of monies paid to a national authority then one should proceed in the national courts. On the other hand if one is pursuing sums withheld by a national authority or has sustained loss resulting from, for example, a regulatory instrument then one could proceed to bring an action for recovery in either the national or EU courts. The choice of one forum appears to rest on whether one is seeking contractual redress or a tortious claim. Clearly one crucial issue will be cost, it is a costly business to sue both the UK Government and the EU.
5 Cases 5,7,13-24/66 Kampffme er v Commission [1967] ECR 6. Ibid at 317 7. Case 26/74 Roquette Freres v Commission [1976] ECR 8. Cases 106 & 107/63 Toepfer v Commission [1965] ECR 405
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Conclusion The biggest regulatory threat we face is without doubt EU Regulations. These are legislative acts of the EU which are directly applicable in Member States without the need for national implementing legislation. We also know that the EU imposes a strict time limit to bring an action, usually two months, but, we can certainly challenge them if there are doubts about the Community’s legitimacy for making a particular piece of legislation. However, EU legislation is secondary legislation and must conform to boundaries laid down by primary legislation, in our case Acts of Parliament, more specifically the European Communities Act of 1972, as amended. That being the case I would refer to The Rt. Hon Lord Justice Laws judgment in Thoburn v Sunderland City Council12 (the weights and measures case) where he states, “There is nothing in the European Communities Act of 1972 which allows the Court of Justice, or any other institutions of the EU, to touch or qualify the conditions of Parliament’s legislative supremacy in the United Kingdom. Not because the legislature chose not to allow it; because by our law it could not allow it. That being so, the legislative and judicial institutions of the EU cannot intrude upon those conditions.” A.L.DANINO M.RES.,LL.B, ASSOCIATE, CULDAN ASSOCIATES
9. Cases 5,7,13-24/66 Kampffme er v Commission [1967] ECR 317 10. Case 96/71 Haegeman v Commission [1972] ECR 1005 11. Douglas-Scott, S, Constituional Law of the European Union, Harlow, UK. Pearson, 2002 at P.403 12. Thoburn v Sunderland City Council [2003] QB 151, para. 58
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