The lawfulness of agencies proliferation in the EU legal order has been evaluated mostly on the basis of some rulings of the EU Court of Justice, albeit rather outdated and subject to varying interpretations. The ‘short selling’ judgment takes a position on this case law and formally endorses it, although it reaches a conclusion that is exactly the opposite of the one that has always been thought as the conclusion that such rulings might lead to. This means that the position of the agencies in the EU institutional framework, the relationship between such agencies and the Commission in the implementation of the EU law, and the reference to Art. 114 TFEU as the legal basis for their establishment deserve to be newly examined. Moreover, the ‘short selling’ judgment highlights the limits of the current integration process, the need for a different approach to the analysis of the so-called ‘agencification’ phenomenon and, more generally, of its impact on the evolution of EU governance.

SOMMARIO:

I. Introduction - II. The political context of the short selling ruling: strains arising from a two-speed Europe? - III. The proliferation of agencies in the EU legal order - IV. The judicial precedents: a brief overview of the cases Meroni and Romano - V. The pleas in law raised by the UK in support of its action and the role of the case law of the ECJ with regard to agencification - VI. The short selling ruling: a general overview - VII. Legal limits to the empowerment of EU agencies: the Court’s reasoning … - VIII. … and its critical assessmen - IX. The legitimacy of Article 114 TFEU as a legal basis: the Court’s reasoning … - X. … and its critical assessment - XI. Conclusions. - NOTE

I. Introduction

On 22 January 2014, the Court of Justice of the European Union (hereinafter referred to as the Court), sitting in Grand Chamber, fully dismissed [1] an action brought by the United Kingdom against the empowerment of the European Securities and Markets Authority (ESMA) [2] in the field of short selling. More specifically, the plaintiff contested the assignment of powers, such as prohibiting or imposing conditions on the entry by natural or legal persons into a short sale, even overruling a decision that the competent national authorities might have taken, to an EU body such as ESMA, which is not envisaged in the primary law. As pointed out by many scholars [3], this ruling lies at the very heart of the long-standing problem regarding the legitimacy of EU agencification [4] and, consequently, of the possibility to reform EU governance by establishing new agencies [5]. Indeed, the first two pleas in law raised by the UK were fully based on those judicial precedents that largely influenced the political and academic debates on this issue. However, the strains on the role of agencies in the EU legal order cannot be seen as the only raison d’être of this judgment. The broader historical and political context from which it originated needs also to be taken into due account, so as to avoid any possible manipulation of the Court’s decision, for instance through its application in different contexts. As it appears from the two aforementioned pleas in law raised by the UK in this case, the delegation of powers to EU agencies has mostly been determined by the Court’s case law, which has acquired a nearly-additive value to the scant provisions of the Treaties. EU institutions have recently agreed to give EU agencies a common regulatory framework [6], but these (late) efforts focus on marginal aspects, without taking a clear stance on the EU agencies’ position among EU institutions and, consequently, on the scope of powers they can be vested with. Therefore, at least until the next revision of the Treaties, the Court’s case law is likely to preserve its pivotal role in guiding possible solutions to these issues. For this very reason, it is crucial to evaluate it carefully. After a brief overview of the judgment from a historical and political perspective (§ 2), the main features of the proliferation of agencies in the EU legal order will be [continua ..]

II. The political context of the short selling ruling: strains arising from a two-speed Europe?

 The United Kingdom claimed for the annulment of a single provision contained in the Regulation on short selling and certain aspects of credit default swaps [7], against whose adoption it had voted within the Council [8]. This regulation is part of a broader set of provisions adopted at EU level in the last few years as a means to countering the financial crisis and those inefficiencies in cross-border supervision that have enhanced the negative effects of financial speculative trading. The steps towards a closer integration in the economic and financial fields, however, seem to have increased the gap between countries inside and outside the Euro area and the fear of the latter to be left out of the European integration process. These conflicts are rather typical when the EU develops using methods of differentiated integration, and perhaps they were even unavoidable [9] with regard to the Economic and Monetary Union. However, they have undoubtedly been exacerbated by the fact that the new goals in the field of financial integration have often been reached without a formal Treaty revision, which has probably sacrificed a certain degree of consensus for the sake of efficiency and, most of all, of rapidity. According to J.-C. Piris, “today in 2011 one of the consequences of the euro crisis is that a ‘two-speed Europe’ is already establishing itself and strengthening, through the necessity for France, Germany and others to unite in order to save the euro. […] ‘a multi-speed Europe starts to look more like a two-speed Europe, with an inner core impelled towards closer political and economic union by the need to rescue the single currency’” [10]. As it is well known, the United Kingdom is particularly sensitive to this point, given the contrast between its firm interest in maintaining a free trade area and its (to say the least) soft willingness to join the single currency used by the majority of the Member States in this area [11]. It is no coincidence that London is engaging a ‘legal battle’ in Luxembourg, where the short selling case is just one of the several frontlines that have been opened [12]. However, it would be reductive to describe this British activism only as a tool to protect the City’s financial interests. It rather reflects the UK’s intention to “make sure that those countries which are not in the euro can remain in the [continua ..]

III. The proliferation of agencies in the EU legal order

After this brief overview of the political context in which the short selling ruling was delivered, some general key points on ESMA and EU agencies should be reviewed [18]. The latter are quite heterogeneous, having different powers and different relations with both the Commission and the national authorities. Among them, ESMA (as the other two European Supervisory Authorities) [19] stands out essentially for three reasons: the extent of its powers (this point will be discussed in detail below, when the UK claim is analyzed), the importance of its tasks and its peculiar composition. With regard to the second point, it is important to highlight that ESMA operates in a rather intrusive way in some sectors that belong to the classical tasks fulfilled by the Commission: the implementation of EU Law, especially through the drafting of delegated and implementing acts, and the supervision of cases of alleged breach or non-application of EU Law. In the first case, the agency adopts draft technical standards that become binding upon endorsement by the Commission. Even if, in theory, they are not binding, they can almost be seen as ‘hard law’ because the law requires that, in order for the binding act to be adopted by the Commission, a draft must first be made by the agency. Moreover, the former is subject to a strict time limit to express its position and, should it decide not to endorse the agency’s draft, it has to explain the reasons for its position and refer the matter back to the agency [20]. For changing these drafts, therefore, the room of discretion left for the Commission is extremely poor. In the second case, ESMA’s task is to investigate and to recommend the action needed in order to comply with the EU Law to the competent national authorities. Should the competent authority fail to comply with ESMA’s recommendation, the Commission issues a formal opinion addressed to the national authority, which shall take into account the agency’s recommendation. Should the alleged breach of the EU Law be still pending, under strict circumstances and without prejudice to the powers of the Commission under Art. 258 TFEU, the agency may adopt an individual decision addressed to a financial market participant requiring the necessary action to comply with its obligations under the EU Law [21]. As far as its internal structure its concerned, ESMA replicates, to a certain extent, the ECB model, since it is [continua ..]

IV. The judicial precedents: a brief overview of the cases Meroni and Romano

The Meroni case [37] is by far the most significant from this perspective, despite the fact that it dates back to 1958. In this case, the Court of Justice of ECSC annulled a decision by the High Authority pursuant to which the applicant was required to pay a certain amount as equalization of the price of the ferrous scrap purchased within the Community. After some arguments on the merits of the contested decision [38] – oddly enough, legal scholars have never paid attention to these points – the Court focused on the method followed for the adoption of the latter. In particular, the Court objected to the fact that the equalization rate, and consequently the amount to be paid by the applicant, had been fixed by bodies established under the Belgian private law (hereinafter, the Brussels agencies) to which the High Authority could not have granted such decision-making powers. This ruling has often been summarized in a statement that, in truth, simply reflects one of the final logical steps in the Court’s reasoning, namely the prohibition to delegate discretionary powers to other bodies than those established by the Treaty in order to exercise them or monitor their exercise [39]. Hence, there seems to be a clear discrepancy between such statement and the subsequent reality of the EU decision-making process, which, even before the financial supervisory authorities were set up, relied on agencies that clearly had discretionary powers, such as the power to grant intellectual property rights or aviation safety certificates. Before analyzing the Court’s reasoning underlying this judgment, it should be pointed out that the prohibition to delegate discretionary powers established in Meroni was not an absolute principle. Indeed, the Court came to such ruling by applying general principles in the field of delegation to the case in point [40]. More specifically, the issue of granting discretionary powers derived from the legal basis of the Brussels agencies (Article 53 of the ECSC Treaty), which explicitly provided that those bodies could be established “for the performance of the tasks set out in Article 3”, i.e. the general purposes of the ECSC. In other words, in Meroni the delegation had, by explicit provision of the Treaty, the broadest purposes of extremely general nature, such that they could not always be pursued fully and simultaneously and [continua ..]

V. The pleas in law raised by the UK in support of its action and the role of the case law of the ECJ with regard to agencification

Against that background, it is easy to understand how the perplexities that surrounded (and, for the reasons that will be explained below, still surround) the proliferation of agencies offered the United Kingdom excellent reasons [47] to question the legitimacy of the choices made by the legislature of the Union on the governance of short selling. More specifically, the UK identified a clear example of violation of the national sovereignty by a pan-European supervisory authority in Article 28 of Regulation (EU) No 236/2012 [48]. Such article is entitled “Intervention powers in exceptional circumstances” and grants ESMA the power to prohibit or impose conditions on the entry by a natural or legal person into a short sale or a similar transaction, or to require such persons to notify a competent authority or to disclose to the public any such position if such situations imply a threat to the functioning of financial markets and the competent national authority failed to adopt measures aimed at tackling such threat, or adopted measures that do not adequately address the threat. It should be recalled that such provision strengthens powers that already existed in abstract terms and were never contested [49] since the establishment of ESMA. Indeed, Article 9(5) and Article 18 of ESMA basic regulation [50]outline the relations between the latter, the financial players and the national authorities and clearly show that a dominant role was played by the former (although it should be pointed out that such general provisions grant the Council – and not the agency – the power to establish whether or not there is a threat to the functioning of the financial markets; it is no coincidence that such rule still applies in the case of an emergency situation related to sovereign debt or sovereign credit default swaps, on which ESMA does not have the same power of direct intervention [51]. The applicant identified the alleged unlawfulness of Article 28 by resorting to a technique that deserves a short discussion. Nothing can be objected against the last two grounds for this legal action, claiming infringement of Articles 290 and 291 TFEU (third plea in law) and Article 114 TFEU (fourth and last plea in law). In the third plea in law, the applicant underlines that Article 28 purports to confer on ESMA “a power to adopt non-legislative acts of general application, whereas in the light of Articles [continua ..]

VI. The short selling ruling: a general overview

The reasoning of the Court closely follows the order of the arguments submitted by the United Kingdom – unlike the approach followed by the Advocate General, who reaches in fact a conclusion opposite to the one taken by the Court in its ruling [55] – and hence it is divided into four parts. However, in abstract terms, they can be grouped into two main issues. The first is the admissibility of a delegation of powers and is related to the first three pleas in law. The second is the possibility to grant the Authority the power to pass binding acts addressed to natural and legal persons on the legal basis of Article 114 TFEU, which is related to the fourth and last plea in law. Consequently, the following analysis shall be divided into two sections (§§ 7 and 8 on the former, and §§ 9 and 10 on the latter) in order to jointly discuss the arguments, which are connected to one another, regardless of the plea in law that they relate to. One cannot avoid observing, in agreement with other Authors [56], that the general approach followed by the Court is not fully satisfactory, as it seems to be simply aimed at solving the specific case, without taking into account its general implications on the agencification phenomenon. As a matter of fact, the case in point raises fundamental issues on the institutional structure of the Union and its possible development, which, consequently, remain basically unanswered. However, it is worth anticipating that this does not imply that such ruling has had a negative impact on the proliferation of the agencies in the EU system. On the contrary, the negotiations on some key aspects of the Banking Union came to a successful end also thanks to the firm position taken by the Court on the possibility to delegate far-reaching powers to the agencies and on the admissibility to resort to Article 114 TFEU to this purpose [57].

VII. Legal limits to the empowerment of EU agencies: the Court’s reasoning …

The Luxembourg judges respond to the first plea in law by following a quasi-syllogistic argument based on a well-defined analysis, which also contributes to the aforementioned feeling of sterility. In essence, such reasoning can be summarized as follows. The delegations that might be deemed unlawful are those that are poorly controlled. In this specific case, there are many forms of control in place and hence the delegation is lawful. More specifically, the thesis underlying this reasoning is that a distinction should be made between limited delegations, whose exercise is subject to controls, and delegations that do not comply with such requirements and therefore are an expression of a “discretionary power implying a wide margin of discretion which may, according to the use which is made of it, make possible the execution of actual economic policies” [58]. Conversely, the antithesis consists in a series of circumstances relating to the form of delegation and to the control mechanisms enacted by the EU institutions. The Court’s arguments, listed without a logical order, may apparently be grouped in two categories: a) the fact that the delegation “does not confer [to ESMA] any autonomous power that goes beyond the bounds of the regulatory framework established by the ESMA Regulation” [59] and b) the presence of “various conditions and criteria which limit ESMA’s discretion” [60]. While the first item is not developed at all, except for a reiteration of the same arguments [61], a long list of such criteria and conditions is provided – albeit no analysis thereof is supplied. They are relevant both for the an agitur (there must be a threat to the orderly functioning and stability of the financial markets, with cross-border implications, which the national authorities are not willing to tackle) and for the quomodo (what is needed, in short, is to balance the need to tackle such threat with other general goals, such as the liquidity of the financial system as a whole and the certainty of trades within such system) [62]. Finally, what is pointed out is that the scope of action of ESMA should be limited to some advisory obligations of the European Systemic Risk Board by a series of delegated acts issued by the Board, which should specify when the conditions enabling the Authority to exercise the contested powers are fulfilled, and the [continua ..]

VIII. … and its critical assessmen

From a general standpoint, the reasoning of the Court on the admissibility of the delegation of powers to ESMA (or, perhaps, even to EU agencies in general, since the third plea in law is expressed in abstract terms) is surprising for two different reasons. First, there is a strident antinomy between a clear confirmation of the Meroni judgment, which is explicitly indicated as the instrument that sets the conditions that a delegation of powers must fulfil, and a total lack of indications on what such conditions really are. Indeed, the Court did not even try to clarify the exact contents of the principles inferred and inferable from Meroni, which, indeed, are applied in the current legal framework with little regard for factual and legal differences. On the former, the Court offered a brief overview [79], where the only element that mattered was the legal difference between the Brussels agencies and ESMA (the former being entities of Belgian private law and the latter a EU body established by the European legislature). On the latter, the Court simply gave implicit indications, by linking the peculiarities introduced by the Lisbon treaty on EU agencies only to the other grounds of the claim, thus hindering the interpretation and, hence, the application of Meroni to the case in point. Secondly, the Court tried, in any possible way, to disregard the changes that the primary law introduced on the inter-institutional balance and on the possibility to delegate executive powers, specifically pursuant to Art. 290 and 291 TFEU, avoiding to take any position on their interpretation. Indeed, as far as the first plea in law is concerned, the Court focused its analysis only on the importance of the checks that a delegation of powers should undergo. When the issues re-emerged in the second plea in law, the Court actually referred to what was (not) said about the first plea in law, stating that the conditions for a delegation of powers, other than for judicial review purposes, were to be found only in Meroni. Finally, when dealing with the third plea in law, the Court formulated the theory whereby ad-hoc procedures existed for the conferment of executive powers to agencies, without specifying the consequences for the powers conferred, pursuant to Articles 290 and 291 TFEU, to EU institutions and to the Member States. Conversely, the Advocate General suggested a more creative approach, in an attempt to ‘put some [continua ..]

IX. The legitimacy of Article 114 TFEU as a legal basis: the Court’s reasoning …

 The fourth and last plea in law had to do with the possibility to confer to ESMA the power to adopt individual decisions, addressed to natural and legal persons, using as legal basis Art. 114 TFEU. In that case, the Court was faced with a different problem, i.e. not the issuing by ESMA of regulatory measures of general application, but rather the adoption of decisions addressed to specific natural and legal persons. The Court starts off its analysis by observing that this circumstance cannot actually be excluded. Consequently, it points out that the compatibility of Art. 28 with Art. 114 TFEU depends on the fulfilment of the two conditions set out by such provision, i.e. the existence of “measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States” and the fact that these have as their object the establishment and functioning of the internal market. The fulfillment of the first condition is sanctioned with a three-pronged argument. Firstly, the Court recalls its own case law [103], pursuant to which the legislature has a broad discretionary power in selecting the most appropriate harmonization method. Secondly, the Court refers to one of its past judgments, which it rendered on another action started by the UK dealing with agencies, ruling that the legislature may establish an EU body to contribute to the implementation of a harmonization process [104]. Thirdly, as a conclusion to the above assumptions, the judges conclude that “the EU legislature, in its choice of [the most appropriate] method of harmonisation […] may delegate to a Union body, office or agency powers for the implementation of the harmonisation sought” [105]. It is also interesting to consider the conditions that must be fulfilled in order for the legislature to make such a choice: “that is the case in particular where the measures to be adopted are dependent on specific professional and technical expertise and the ability of such a body to respond swiftly and appropriately” [106]. As will be explained below, such three-pronged argument is not fully convincing, also because the qualification of the contested provision as a ‘measure for the approximation’ was crucial to clear the doubts, which many expressed, on the legal basis indicated not only – and not so much – for the regulation on short selling, but rather for the establishment [continua ..]

X. … and its critical assessment

 The reasoning followed by the Court on the admissibility of Art. 114 TFEU as the legal basis for granting such powers to an agency raises a few doubts, both on the immediate result (i.e. considering such power as a ‘measure of the approximation’) and on the general implications thereof (i.e. using Art. 114 TFEU as the legal basis for establishing agencies with powers similar to those granted in this case). It should be noted that these issues were extremely important, also in light of the doubts raised by the Advocate General in his conclusions. More specifically, the latter recommended to grant the UK application on the basis of this plea in law, pointing out that the decisions made by ESMA based on the contested provision acted as a way to “lift implementation powers […] from the national level to the EU level” [113] and, consequently, stating that “the outcome of the activation of the Authority’s powers [under the contested provision] is not harmonisation, or the adoption of uniform practice at the level of the Member States, but the replacement of national decision making […] with EU level decision making” [114].Indeed, according to the Advocate General, in the context of short selling, “the Authority is not developing specific and more detailed rules applicable to a given financial product or service […]. Rather, the Authority is intervening on the conditions of competition in a particular financial market, [the closest analogy to which is provided] by the Commission intervention powers in the field of agriculture and anti-dumping, that is in areas where the Commission implements a common EU policy” [115]. In light of the issues raised by the Advocate General, the analysis made by the Court seems to be rather superficial. In fact, it does not explain why the mere fact that the legislature may establish bodies in charge of contributing to the harmonization process with a technical expertise implies that assigning binding powers to them is an approximation measure. Although the legislature has a large measure of discretional powers in selecting such measures, it is not clear why such general discretional powers may legitimately translate in a delegation of binding powers to agencies for the mere fact that, based on the same provision, the legitimacy of the establishment of agencies with non-binding powers has already [continua ..]

XI. Conclusions.

 In light of the judgment discussed above, a clear conclusion seems to be that a delegation of powers to the agencies is admissible, including for the issuing of acts of general application, even though on the basis of Art. 114 TFEU, provided that the relevant powers are subject to judicial review and provided that they are set within a monitoring framework whose pervasiveness is, unfortunately, not known in detail. What is also unclear is when the legislature may choose such option. For sure, sectors that require a specific professional and technical expertise must be involved. Should the selected legal basis be Art. 114 TFEU, the measures that the agency will be called upon adopting must also rely on the ability of the agency to act rapidly (also as a result of the technical expertise). Paradoxically, although the case under examination explicitly refers to Meroni as the basis indicating the conditions under which a delegation of powers to agencies is admissible, it rather seems to prove that the debate on this point was excessively, and perhaps blindly, focused on the analysis of judicial precedents instead of finding the principles that would allow or restrict such exercises in the living law. Indeed, the validity of Meroni is confirmed, but with a view to reaching the opposite result as compared to what people had always thought it could lead to. Now, even though Meroni is referred to, a delegation of clearly discretionary powers has been admitted, thus clearly shifting the focus from the issue of a delegation of such powers to the need to identify suitable control mechanisms. To some extent, this is simply the flip side of the matter. However, this change in perspective expresses a fundamental change which fully legitimizes the inclusion of agencies in the institutional system of the Union. In other words, discretional appreciation has been accepted and apparently the legislature should no longer worry so much about it. The point is simply to identify control systems in order to establish an effective discipline for exercising the delegated discretionary powers. From this opposite perspective, what comes into the spotlight is the principle of separation between technical and political powers, which had already emerged in the institutional practice of the Union, although its interpretation was hindered by the ambiguity of the value attributed to the rulings of the Court of Justice mentioned many times [continua ..]

NOTE