The financial services industry and the European Central Bank: the UK has won a battle, but can it win the war?

 

Steve Peers

Until yesterday, two trends seemed consistent in the jurisprudence of the EU courts. First of all, the UK kept losing cases relating to the interests of its financial services industry: on short-selling (discussed here), the financial transactions tax (discussed here) and bankers’ bonuses (discussed here). Secondly, the UK kept losing cases concerning its opt-outs from EU law (for instance, on social security and the immigration opt out, see here).

However, yesterday’s judgmentof the EU’s General Court on the UK’s challenge to the European Central Bank (ECB) policy on securities clearing systems bucks both trends. What are its implications for the UK's financial services industry, and for the UK's relationship with the EU?

The judgment

The UK challenged a ‘Policy Framework’ published by the ECB, which set out the role of the ‘Eurosystem’ (the ECB and the national central banks of Eurozone states) as regards payment, clearing and settlement systems. Sweden supported the UK, while Spain and France supported the ECB; the Commission stayed neutral. The UK objected to the Policy Framework provisions which stated that any central counterparties (CCPs) that held more than 5% of the credit exposure for one of the main euro-denominated product categories had to be legally incorporated and fully controlled from within the euro area. This would inevitably mean that a portion of the financial services industry which was traditionally located in the City of London would have to move to one or more Eurozone financial markets instead.

First of all, the judgment examined the admissibility of the action. The General Court rejected the ECB’s argument that its Policy Framework was not a reviewable act, ruling that despite its apparent soft law form it would perceived as a de facto binding policy and would be applied by Eurozone regulatory authorities in practice. Also, the Court ruled that the UK had standing to bring a legal action against acts of the ECB, despite its opt-out from the single currency.

Secondly, the Court ruled on the substance of the case. It was only necessary to rule on one of the UK’s five arguments against the validity of the Policy Framework: that the ECB lacked competence to adopt a measure on the location of CCPs. (The other arguments concerned Treaty free movement rules, competition law, non-discrimination on grounds of nationality and proportionality).

The ECB had claimed a power to regulate on the basis of Article 22 of its Statute, which takes the form of a Protocol attached to the Treaties, and states that the Bank ‘may make regulations, to ensure efficient and sound clearing and payment systems within the Union and with other countries’. Also, the Bank referred to Article 127(2) TFEU, which gave it the task ‘to promote the smooth operation of payment systems’, and the ECB’s general objective of maintaining price stability and supporting general economic policies, as set out in Article 127(1) TFEU.    

In the Court’s view, however, these powers only extended to the ability to regulate ‘payments’ in the narrow sense, ie the ‘cash leg’ of clearing operations, not the ‘securities leg’, since securities do not in themselves constitute payments. Article 22 of the ECB Statute could only apply to payment systems with a clearing stage, rather than all clearing systems, in the absence of any explicit reference to the clearing of securities. The Court also rejected the ECB’s argument that it had an implied power to regulate such issues, since such implied powers only existed ‘exceptionally’.

Finally, the Court concluded by sketching out (in effect) a ‘roadmap’ to change the current situation. Acknowledging that there are ‘very close links’ between payment systems and securities clearance systems, and that disturbances affecting securities clearance can affect payment systems, it stated that Article 129 TFEU could be used to amend the relevant provisions of the ECB Statute to extend the Bank’s powers in this field. So it suggested that the ECB could trigger that amendment process by requesting the EU legislature to amend the Statute.

Comments

The essential elements of the Court’s judgment (which could still be appealed to the Court of Justice) are convincing. From the perspective of accountability, the ECB should not be able to adopt ‘policy frameworks’ with quasi-mandatory language that will likely be applied in practice, as a means of evading the judicial review that would certainly apply if it adopted those rules (as its Statute specifies) in the form of regulations. Nor is it acceptable that the ECB could adopt measures with an impact on non-eurozone Member States and deny those countries standing to sue it, especially when the Treaties (as the Court pointed out) contain no limits on such standing.

As for the substance of the case, the Court is surely right, in the interests of accountability, to say that EU institutions’ implied powers have to be interpreted narrowly. There have been five major Treaty amendments in thirty years, and so there have been plenty of opportunities for Member States to decide what powers ought to be conferred upon EU institutions, and what powers should not. In the absence of an express conferral of power, the cases where the institutions have implied powers should be very exceptional indeed.

However, the Court takes an unusually narrow approach to the interpretation of an express power, namely the possibility for the ECB to regulate ‘clearing and payment systems’ as set out in its Statute. It is not self-evident that this provision can only apply to the ‘cash leg’ of clearing systems, especially in light of the links between payment and securities systems, and the impact of disturbances affecting securities clearance, which the Court expressly acknowledges.

This key aspect of the ruling can only be understood in light of the broader political context of this case. If the ECB had won, that result would have been widely regarded in the UK as a carte blanche for the ECB to split up the single market in financial services, as part of a broader ‘ganging up’ of Eurozone Member States against non-Eurozone Member States, in particular the UK. This would have been a rather hyperbolic reaction, since an ECB victory would not necessarily have had an impact beyond the specific issue of securities clearance, and the Eurozone Member States do not gang up as easily as is sometimes imagined: witness the current relationship between Greece and Germany, for starters. Nevertheless, it’s no wonder that the judges believed it would be wiser to hand this hot potato back to the politicians.

It’s striking, though, that the judges’ roadmap to give the ECB more powers is particularly easy to follow. The use of Article 129 TFEU to amend the ECB Statute only requires a proposal from the Commission or a recommendation of the ECB, followed by the ordinary legislative procedure, entailing joint power for the European Parliament and a qualified majority vote in Council. Although all Member States would have a vote, Eurozone States (if they do gang up together on this point) can now outvote non-Eurozone States.  The UK would have to seek alliances, rather than threaten vetoes, to block such a move. The referendum requirement in the UK’s European Union Act 2011 wouldn’t apply (see s. 10(1)(b) of the Act; the requirement for parliamentary approval there is meaningless, since the UK could be outvoted). Indeed, the UK would need the backing of some Eurozone States, as well as all non-Eurozone States, to block such a Treaty amendment. This would entail, for instance, securing the support of countries like Poland, at the same time as the UK (whichever of the two largest parties forms the biggest part of government after the next election) seeks to cut back the rights of Polish workers.

Failing that, the UK could bring a legal challenge to the Treaty amendment, or the ECB measure implementing it, invoking again its arguments concerning the internal market, competition law, discrimination and proportionality, which were not addressed in the General Court’s judgment. There’s a strong case to be made that the valid objective of regulating securities clearance effectively could be ensured by collaboration between the ECB and the Bank of England, rather than forcing some part of the financial services industry to move from the UK to the Eurozone, but the UK could not count on the EU courts accepting it.  

What are the broader implications of this judgment for the UK’s role in the EU? First of all, it weakens the pro-Brexit argument that ‘we should leave the EU because the Eurozone Member States are ganging up on us’. For now, the UK has won this battle, and it’s only a hypothetical possibility that it will lose the war later on. Secondly, it weakens the argument that ‘the City of London would be perfectly fine after Brexit’. If that were true, then why were Eurosceptics poised to make an unholy fuss if the UK had lost this case? Indeed, if the UK were not in the EU, it would not have had the privileged standing to sue the ECB, and the government (or British securities firms) would have had to go through national courts in the Eurozone to challenge this policy instead. Moreover, it might be harder to invoke the other arguments which the UK made in this case (and would have to make in future), depending on what legal arrangements governed the EU/UK relationship after Brexit.

 

Barnard & Peers: chapter 19

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Capping bankers' bonuses: a step too far for the EU?

Steve Peers

Bankers are never going to win a popularity contest. The collapse of international financial markets which started in 2008 and has led to austerity across Europe has been widely blamed on lax regulation of banks and irresponsible behaviour by bankers. It has led to a huge overhaul of EU banking regulation, including the transfer of banking supervision to the European Central Bank, new rules on bank bail-outs, and provision for criminal law sanctions against bankers involved in market abuse (discussed here). EU law has gone further still, and adopted rules which cap the amount of bonuses paid to bankers.

The United Kingdom, home to the biggest financial services industry in the EU, has had reservations about some of these new laws. It has opted out of some of them (the market abuse rules, the banking supervision rules and aspects of the bank bail-out rules), and has challenged others in the CJEU. Earlier this year, its challenge to the ban on ‘short-selling’ failed in the Court (see discussion here), and today’s Advocate-General’s opinion suggests that its challenge to the restrictions on bankers’ bonuses should fail too.

These restrictions are found in the EU’s revised rules on capital requirements and the authorisation to take up banking services, which are set out in a parallel Regulation and Directiveadopted in 2013. In effect, they require that bankers’ bonuses cannot usually be more than the amount of their ordinary annual salary. By way of exception, the bonuses can be double the amount of the banker’s ordinary annual salary, if bank shareholders agree pursuant to a special procedure.

Advocate-General’s Opinion

The UK raised six main complaints against the bonuses rules: lack of competence by the EU to regulate pay; infringement of the principles of subsidiarity and proportionality; violation of the principle of legal certainty; illegal delegation of power to an EU agency (the European Banking Authority); breach of EU rules on data protection and privacy, due to the potential disclosure of the pay received by bankers; and a breach of the principles of customary international law, due to the extraterritorial effect of the rules. Advocate-General Jaaskinen argues that all five complaints be rejected.

First of all, the Advocate-General argues that Article 53 TFEU (the legal base for this measure) is correct, because that legal base can extend to banking regulation generally, not just the promotion of the freedom of establishment for banks. The pay cap does not constitute a ‘social policy’ measure, since it does not regulate the basic salary paid to bankers, which is the basis for calculating any additional bonus.

Secondly, data protection rules are not violated, because the disclosure of bankers’ pay is only discretionary, not mandatory. In the event that Member States make a request for such disclosure, they would then be bound by EU data protection law.

Thirdly, conferring powers upon the EU agency is not illegal, because the powers do not concern the essential elements of the legislation, and the EU Banking Authority does not adopt the measures itself, but merely recommends their adoption to the Commission.  Fourthly, the principle of legal certainty is not infringed by applying the new rules to pre-existing employment contracts. Fifthly, the principles of proportionality and subsidiarity are not violated, because the creation of a uniform system of risk management was better achieved at EU level, rather than national level, and the EU institutions have great discretion to assess how these principles apply. Finally, the UK has not made out its argument that customary international law rules out the extraterritorial application of such limits.

Comments

This case is not about whether limiting bankers’ bonuses is a good idea. Rather it concerns whether it is legal for the EU to limit them. If the EU lacks such power, there would in principle nothing to prevent Member States from limiting bankers’ bonuses individually, if they wished. The argument about whether to do so would then be held at a national level, rather than the EU level.

Some of the UK’s complaints are clearly unconvincing.  As the Advocate-General suggests, the argument about international law is not fully fleshed out or convincing. The legal certainty argument fails to consider that employment law regulation usually impacts upon existing contracts; this is justifiable in light of the public-interest principles underlying the very nature of employment law. Anyway, bonuses are inherently variable. As for the data protection argument, the Opinion largely follows what the CJEU established already in EP v Council (family reunion): if EU law provides for options for Member States, the compatibility of those options with human rights law should be judged when and if Member States exercise those options. In any event, prior case law on data protection and salary disclosure does not set out an absolute ban on release (see Satamedia, for instance).

The UK’s other arguments are rather stronger. While it is true to say that the EU’s banking agency does not actually take the final decision relating to implementation of the bonus cap, it does more than simply provide expert advice on this issue. The Commission must then either act on this advice or do nothing at all: so it does not have full discretion to adopt the delegated acts (see the complex decision-making system set up by the Regulation establishing the Banking Authority). This process is fundamentally questionable because it blurs the accountability for the decision being taken (and moreover, it is too convoluted to be transparent).   

As for proportionality and subsidiarity, certainly the events of the last six years have demonstrably indicated that a more decentralised system of managing banking risks was ineffective. Hopefully the EU-wide measures will be more successful, but in any event the nature of the subject-matter calls for an EU-wide response, in light of the level of integration between European financial markets and the potential cross-border impact of bank failures. But that isn’t the point: the UK is not challenging the entirety of the capital requirements rules, but only some of the handful of provisions which regulate bankers’ bonuses. In fact, it is not challenging those provisions which prevent bankers from receiving bonuses as a consequence of risky behaviour, but only those provisions which regulate bonuses regardless of bankers’ actions. So the opinion should instead have asked whether theseprovisions meet the requirements of the subsidiarity principle. It is hard to see how they do.

This brings us to the biggest problem with the Opinion: the argument that the legal base on freedom of establishment can regulate bankers’ bonuses. The legal base point here can only be understood by viewing the Treaty as a whole. It has separate provisions on social policy, which include a ban on EU regulation of pay (Article 153 TFEU). The general internal market power (Article 114 TFEU) specifically states that it ‘shall not apply to’ measures ‘relating to the rights and interests of employed persons’. The Treaty drafters’ intention was clearly to provide for lex specialis rules relating to regulation of pay.

The ban on EU regulation of pay has been clarified in the case-law of the CJEU. In the Impact judgment, for instance, it ruled that the EU could not regulate the level or components of pay, but it could establish non-discrimination rules relating to pay as regards categories of workers. Similarly, the working time directive provides for holiday pay, but does not regulate the level or components of pay which a worker normally receives (which then constitute the basis on which the holiday pay is calculated).

Following the logic of these precedents, it is true to say that the capital requirements legislation does not set the level of bankers’ pay, on the basis of which the bonuses are capped. But it does regulate the components of pay, by determining how much of the total amount of pay can be variable. The Advocate-General’s reasoning would mean that the EU would be free to regulate at least some aspects of workers’ pay in any area of law subject to special rules in the Treaty, rather than the general internal market legal base. So the EU could regulate aspects of the pay of farmers, fishermen, transport workers and anyone in other service industries.

It could reasonably be argued that aspects of pay in these other fields can exceptionally be regulated by EU law where that is an essential component of the regulatory framework. This could be the case in banking, for instance if the overall amount of pay could damage the existence of the bank or bonuses were linked to risky behaviour. The legislation does have rules on these issues, but the UK has not challenged them. So it follows that the opinion is fundamentally unconvincing on the legal base point.

In light of the financial crisis, there are many good reasons to regulate banks more effectively, and it would not be shocking if Member Stateswanted to react to understandable public anger at the huge cost of bank bail-outs by limiting bankers’ income. But resentment at bankers’ pay, even it is entirely justified, cannot authorise the EU to exercise powers which any reasonable interpretation of the Treaties suggests that it just does not have.


Postscript (November 21st): Like any Advocate-General's opinion, this view is non-binding, although a number of British journalists and politicians forgot this when the opinion was released. In any event, the point is moot since, following publication of the opinion, the UK's Chancellor decided to drop the legal challenge. His official reason was to save taxpayers' money, but this is not convincing since a large majority of the legal fees will surely already have been incurred, and there is still a chance to get them reimbursed if the UK wins the case. A victory for the UK would have not have been improbable, given that the CJEU did not follow this Advocate-General's views in the last major banking law case (concerning the ban on short-selling), and that the analysis of the legal basis point is not very convincing. 

 

Barnard & Peers: chapter 14, chapter 19

 

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“So these lawyers walk into a Bar and … “ The Court of Justice liberalises cross-border access to the legal profession

Dr Julian Lonbay, Senior Lecturer,
Postgraduate Research Admissions Tutor, Birmingham Law School, University
of Birmingham

Introduction

Does EU law allow its citizens to seek the quickest possible means to qualify for a professional activity, even if it means leaving out large areas of training required by national law on access to the national profession that exercises that activity? The Court of Justice has addressed this issue recently in its judgment in Joined Cases C-58/13 and C-59/13 Angelo Alberto Torresi and Pierfrancesco Torresi v Consiglio dell'Ordine degli Avvocati di Macerata.

Background: Mobility rights for lawyers under Directive 98/5/EC

In Italy, as elsewhere across Europe, there is a special section of the roll of lawyers (elenco) for those lawyers emerging from elsewhere in the European Economic Area who are seeking to establish under their ‘home State professional title’ in Italy. This follows the implementation of Directive 98/5/EC to facilitate practice of the profession of lawyer on a permanent basis in a Member State other than that in which the qualification was obtained. This Directive requires host State Competent Authorities to register and automatically recognise the professional titles of lawyers, whose professions are listed in Article 1(2) of the Directive. Such lawyers, once registered, have the right to exercise their profession in the host country, according to Article 5 of the Directive.

However, unlike other countries, in Italy 92% of the registered European lawyers are Italian nationals. The Consiglio nazionale forense (Italian National Bar Council) has established that nearly 3,500 such registered European lawyers were Italian nationals who had obtained their professional title elsewhere in the EEA. 83% of these lawyers had obtained their professional title, abogado, in Spain.

The via spagnola

Spain, until recently, imposed no requirement for post–university mandatory training before becoming an abogado. One simply had to have a Spanish law degree, or one recognised as equivalent to a Spanish law degree, and one could register with one of the eighty-three Spanish Bars as an abogado. [There is now a mandatory training period and State exam in Spain, the first of which was held in 2014.]

As many Italians with a laurea in guirisprudenza (Italian law degree) discovered, the Spanish authorities often considered the Italian Law degree to be equivalent to a Spanish law degree, and their degrees could be homologated more or less automatically. Armed with their new Spanish recognised diplomas they could enrol as lawyers in Spain, and thence return triumphant to Italy, where they were entitled (under Directive 98/5/EC) to practise as Spanish lawyers. Such practise can include dealing with matters of Italian law (subject to some deontological and other restraints). So instead of undergoing the required Italian period of legal practice and passing a State exam before being able to practice as an avvocato (Italian lawyer), which would take at least two years, they could qualify abroad more speedily, and then return as lawyers from another Member State and practice in Italy as such. 

An abuse of EU law?

The Italian Bars were concerned at this practice and considered it to be an abuse of European Law and argued even that it threatened the Italian national identity which should be protected by Article 4(2) TEU.

The Torresi cases were an opportunity to see if EU law could bear such an interpretation. The two Torresis returned from Spain qualified as abogados, and asked the Bar of Macerata (in Italy) to inscribe them on the special roll for registered European lawyers. The Bar Council of Macerata took no decision within one month (which was the time limit set by Italian law), and they then turned to the Consiglio nazionale forense(CNF) asking it to take action on their applications. The CNF was not convinced that Article 3 of the Directive could be used in such circumstances which it thought might constitute an ‘abuse of law’ and be contrary to Article 4(2) TEU

‘in that it permits circumvention of the rules of a Member State which make access to the legal profession conditional on passing a State examination, given that the Constitution of that Member State makes provision for such an examination and that the examination forms part of the fundamental principles of protecting consumers of legal services and the proper administration of justice?’

Two questions were referred to the CJEU by the Italian CNF. Preliminary issues of jurisdiction and capacity took up much of Advocate General Wahl’s Opinion (§§19-83) and more than half of the Grand Chamber’s ruling. The substantive legal issues dealt with aspects of the free movement of lawyers under Directive 98/5/EC and are dealt with below.

The following questions were referred to the CJEU:

‘1.      In the light of the general principle which prohibits any abuse of rights and Article 4(2) TEU, relating to respect for national identities, is Article 3 of [Directive 98/5] to be interpreted as obliging national administrative authorities to register, in the register of lawyers qualified abroad, Italian nationals who have conducted themselves in a manner which abuses EU law, and as precluding a national practice which allows such authorities to reject applications for registration in the register of lawyers qualified abroad where there are objective circumstances to indicate that there has been an abuse of EU law, without prejudice to respect for the principles of proportionality and non-discrimination and to the right of the person concerned to institute legal proceedings in order to argue a possible infringement of the right of establishment and, consequently, the possibility of judicial review of the administrative action in question?

2.      If the first question should be answered in the negative, is Article 3 of [Directive 98/5], thus interpreted, to be regarded as invalid in the light of Article 4(2) TEU, in that it permits circumvention of the rules of a Member State which make access to the legal profession conditional on passing a State examination, given that the Constitution of that Member State makes provision for such an examination and that the examination forms part of the fundamental principles of protecting consumers of legal services and the proper administration of justice?’

Were the Italian via spagnola practices an abuse of EU law?

Advocate General Wahl

The Advocate General first acknowledged that ‘abuse of law’ was a recognised concept in EU law. Citizens could not fraudulently or abusively rely on EU law. The concept of abuse had both objective and subjective elements that had to be assessed by national courts, but without compromising EU law.  Objectively EU law should not lead to the “wrong results” and ‘subjectively’ there should be no manipulations or artificial fulfilment of the conditions of EU law so that one could benefit from its provisions “abusively”.  

In this case the Advocate General the Italian practice in question showed the EU law was functioning correctly and achieving its correct aims. Nothing in Directive 98/5/EC indicated that the EU legislature wished to allow Member States to practise “reverse” discrimination against their own nationals. EU citizens were entitled to seek out the most favourable jurisdiction in which to qualify. This indeed was the rationale for “harmonising” the pre-conditions for exercising the rights conferred by Directive 98/5/EC.

Fraud

If there was a legitimate fear of fraud, then, in those rare cases, an investigation could be legitimate and Article 13 of the Directive, encouraging close collaboration between competent Authorities in the relevant Member States in such cases, should be used.

Italian national Identity (Article 4(2) TEU)

As to the threat to Italian national identity the Advocate General was perplexed, how did the fact that an Italian used EU law rights to become a Spanish lawyer and then practice in Italy as such, threaten Italy’s legal order and compromise Italy’s national identity? The Italian Government, at the hearing, had not supported the CNF on this point. The Torresi pair were not seeking access to the Italian legal profession itself, but to the Italian legal market as abogados. The Parliament, Council, Spanish and Polish Governments, intervening , had all considered that Italy maintained its rights to control access to the profession of avvocato. How could Italy deny an abogado right to practice in Italy? It was Spain’s competence to determine how anabogado qualified and it would strike at the heart of Directive 98/5/EC to allow such an interpretation.

Grand Chamber of the CJEU

The CJEU convened as a Grand Chamber to consider the case.  Having disposed of the preliminary jurisdictional issues they turned to the substantive questions of law. First they pointed out their earlier case law interpreting Directive 98/5 as a mechanism for the “mutual recognition of professional titles of migrant lawyers”.

§38
In that context, Article 3 of Directive 98/5 undertakes a complete harmonisation of the preliminary conditions required for the exercise of the right of establishment conferred by that directive, providing that a lawyer who wishes to practise in a Member State other than that in which he obtained his professional qualification is obliged to register with the competent authority in that Member State, which must effect that registration ‘upon presentation of a certificate attesting to his registration with the competent authority of the home Member State’ …

Presentation of the home State certificate by the migrant lawyer was the sole condition applicable before registration in the host State. The CNF argued that this was an abuse of law, as they were evading the Italian training requirements.

Abuse of Law

The Court confirmed that abuse of law was a concept that EU law recognised, and that Member States could take measures to prevent nationals from ‘improperly’ circumventing national law. Echoing Advocate General Wahl they considered that the concept had both objective and subjective dimensions. If, despite formal observation of the conditions of EU law, the objectives of that law were not met then the objective condition for abuse of law was met. The subjective element required an intent to obtain an improper advantage from EU law by ‘artificially’ complying with conditions set down.

Applying this test to the Torresi cases they declared:

            §48

… it must be held that the right of nationals of a Member State to choose, on the one hand, the Member State in which they wish to acquire their professional qualifications and, on the other, the Member State in which they intend to practise their profession is inherent in the exercise, in a single market, of the fundamental freedoms guaranteed by the Treaties …

It could not be an abuse of law as it was the intention and purpose of EU law to create the opportunity for an EU citizen with a degree to travel elsewhere, qualify there, and then return. The objective element of the abuse of law test was not met. EU law intended the result complained of. The fact that they were availing themselves of more ‘favourable’ legislation was not enough to meet the subjective element of the test.

Italian national Identity (Article 4(2) TEU)

The Court confirmed that EU law must ‘respect the national identity of Member States’ (Article 4(2) TEU). The Italian CNF argued that Article 3 of Directive 98/5/EC allowed a circumvention of Article 33(5) of the Italian Constitution as it allowed Italians to evade the national Bar exam, thus allowing circumvention of rules that formed part of the Italian national identity. The Court followed the Advocate General and confirmed that Article 3 of the Directive gave access to the legal market in Italy, not the Italian profession of avvocato (lawyer), therefore there was no evasion of national rules. They confirmed also that the Italian Government, at the hearing, had accepted this.

Commentary

The Court in this ruling is supporting a view that EU law allows for regulatory competition. There is a market formed of the national regulatory regimes for legal services of the Member States. Citizens and businesses can choose which regime to opt for. In doing so, it is true that future lawyers can leave out aspects of training that would have been required had they remained at home. But in making that choice there is no abuse, it was what EU law was designed to do. It is really no surprise that States are no longer fully sovereign within their territories. By the logic of the single market, borders are supposed to be disappearing.

In this case, EU law, decided by the Member States, has decreed that once admitted to the nominate legal professions, recognised in Article 1(2) of Directive 98/5/EC, then those with the relevant professional titles have the right to establish in another Member State, as set out in Directive 98/5/EC, under their home State professional titles. This means that it cannot be an abuse of law to exercise these rights. The purpose of the rule was to permit that very mobility.

Member States do not have to have identical rules for accessing the profession of lawyer. The content of education is a matter that is, in the main, reserved to Member States. Equally the range and depth of reserved legal activities varies across the EEA. So some States allow non-lawyers to practise in areas that, in other States, are reserved for particular legal professions. It is recognised that access to legal practice varies profession by profession, country by country, across the EEA. This causes complications when lawyers move across borders as their training and range of activities will be different. For the consumer of legal services this is great as they can have a wide choice of expertise to draw upon. For the regulators it is uncomfortable. They must co-ordinate with professional regulators from other Member States. They must learn and understand the regimes operating elsewhere. They must co-ordinate should disciplinary issues arise, and they must consult each other should complexities or misunderstandings arise when the migrant lawyer is seeking access to a host State legal market. All this interaction encourages pan-European engrenage (enmeshment) at many levels.

In the Torresicase the Consiglio nazionale forensedid not raise the issue of Article 10 of the Directive. This allows a migrant lawyer who has been practising law under the home State title for three years, to convert into an avvocato. Such lawyers must show that they have

effectively and regularly pursued for a period of at least three years an activity in the host Member State in the law of that State including Community law.

These lawyers are exempt from any aptitude test or adaptation period. Thus a few years down the line, the Italians who have taken the via spagnola will be easily incorporated into the Italian legal profession. This was probably not raised at the Court of Justice, as it had already indicated in its earlier case law that such access did not infringe the principle of non-discrimination.

In Luxembourg v Parliament and Council, Luxembourg had complained that Article 10 allowed the practice of national law by migrant EEA lawyers, without regard to any training requirements in national law. Luxembourg lawyers had to undertake a whole raft of training in national law, so why should the migrant lawyers be exempted? Furthermore could Luxembourg not protect its consumers of legal services against these untrained hordes of migrant lawyers? The Court found that there were sufficient safeguards in the EU legislation to protect consumers, and that national and migrant lawyers were not in exactly comparable situations, so discrimination had not arisen. The migrant lawyers had various restraints imposed upon them by the Directive itself. Thus there was no issue of ‘unequal treatment’ that EU law might have sanctioned.

The court, in Torresi , has re-affirmed the primacy of the Single market. It is there to benefit citizens and businesses in Europe, not to make life easy for the national regulators of economic activity. Future European lawyers can pick and mix their training and, once qualified, can decide where in Europe to practice. The forces unleashed by this liberalization fosters an ‘ever closer’ Union for providers of services, their consumers and also for the regulators of legal services.

Barnard & Peers: chapter 14

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The CJEU transforms family reunion for Turkish citizens

Steve Peers

In this week’s judgment in Dogan, the Court of Justice in effect established a new set of rules for family reunion for most Turkish citizens living in the EU – although those rules will still differ in each Member State.

The case concerned Mrs. Dogan’s application to come to Germany to live with her husband, after spending thirteen (by now sixteen) years apart. She was refused on the grounds that her German language skills were not satisfactory, for even though she passed the relevant language test, her written German was not satisfactory due to illiteracy.

This raised two legal issues. First of all, since her husband ran a business in Germany, did the national rule breach the 1970 Protocol to the EU/Turkey association agreement, which prohibits new restrictions on establishment or the provision of services? Secondly, did the national rules comply with the EU’s family reunion Directive, which permits Member States to require family members to comply with ‘integration measures’?

The Court of Justice decided to answer only the first question. This means that its ruling is only relevant to Turkish nationals, rather than all third-country nationals. Having said that, Turkish nationals make up a large proportion of all third-country nationals in the EU, and the Court’s judgment on this point applies to all Member States, including the UK, Ireland and Denmark, which do not apply the family reunion Directive.

However, it should be noted that the Advocate-General’s opinion also argued that the integration requirement breached the family reunion Directive (see discussion here), and that there is another case before the CJEU which raises this issue (notably the K and A case; see further the Commission's recent guidance on the Directive, discussed here).

The judgment

Previously, the CJEU had held that the standstill on new restrictions on establishment and provision of services was binding, had direct effect, and prevented any new measures making it more difficult to exercise self-employment or provide services. But the previous case law only concerned those persons who were actually self-employed or providing services. Could it extend also to the rules regulating the family members of such persons?

The CJEU said it could. In the Court’s view, where the national law made family reunion ‘difficult or impossible’, the establishment of a self-employed person could be ‘negatively affected, since that person would ‘find himself [or herself] obliged to choose between his [or her] activity in the Member State concerned and his [or her] family life in Turkey’. In this case, the national rule made family reunion more difficult, and so violated the standstill clause.

Finally, the Court noted that a measure infringing the standstill clause could be permissible, if it could be ‘justified by an overriding reason in the public interest’, and was ‘suitable to achieve the legitimate objective pursued and does not go beyond what is necessary in order to attain it’. In this case, assuming that the objectives of the national law (preventing forced marriages and promoting integration) were overriding reasons in the public interest, the national law failed the proportionality test, since the refusal of an application on linguistic grounds was automatic, without taking account ‘of the specific circumstances of each case’.

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In order to assess the impact of the Court’s ruling, it is necessary first of all to determine its scope. The geographical scope, as noted already, is all Member States. Also, while the family members of Turkish nationals will usually reside in Turkey, the judgment should logically apply also if those family members reside in another third State, or in a Member State. Although in the latter case, it is possible that EU immigration law, such as the long-term residents’ Directive, might also apply, that legislation is without prejudice to more favourable rules in treaties between the EU and third States.

The temporal scope, as established in the previous Dereci case, is 1973 for the first nine Member States (the date of entry into force of the 1970 Protocol to the association agreement), and the date of joining the EU for all other Member States. That means that the national law in force on that date regarding family reunion cannot be made worse for those joining Turkish nationals. Moreover, as established in Toprak and Oguz, if the national law is made more liberalafter that date, the standstill also prevents any reversion to the more restrictive law.

Next, what is the personal scope of the judgment? There are three facets to this issue: the sponsor (ie the Turkish citizen in the EU); the family members who seek to join them; and issues of nationality law.

For the Turkish citizen in the EU, the standstill which the Court discussed here also applies to providers of services, but not (as the Court established in Demirkan) to recipients of services. There is also a parallel standstill relating to Turkish workers: according to Article 13 of Decision 1/80 of the EU/Turkey Association Council, the rules on access to employment of Turkish workers and their family members cannot be made more restrictive either. The case law on this provision (see most recently the Demir judgment) makes clear that the standstill on workers and the standstill on establishment must be interpreted the same way (although for the first nine Member States, the standstill on workers took effect in 1980, rather than 1973). In particular, the standstill on workers applies to measures concerning their first admission. It must logically also apply to rules on the first admission of the worker’s family members, since workers, like self-employed persons, would otherwise face a choice between carrying on with employment in a Member State and enjoying family life in another country.

As for family members, while this case concerned spouses, it would logically apply to any other family member as well (Mrs. Dogan had also originally applied for two of the couple’s four children to be admitted also). Simply put, the Turkish citizen in the EU could equally face a choice between his or her economic activity and family life with unmarried partners, children, parents or other family members as well.

Next, as for issues of nationality, one question is whether the primary right-holder and/or the family members concerned can still rely on the rule, if they are dual citizens of Turkey and another country. This question appeared to be answered by the CJEU in Kahveci and Inan, in which it ruled that dual citizens of Turkey and a Member State can rely on the EU/Turkey association rules. But in the pending case of Demirci, concerning social security, an Advocate-General has recently argued that dual citizens cannot invoke the rules. The CJEU will likely clarify this issue soon.

Another nationality-related question is whether third-country national family members of Turkish nationals (in this context, meaning family members who are not nationals of Turkey or a Member State) are covered by the standstill rules. It is clear that they are, by analogy with the recent judgment in Dulger.

Next, what is the material scope of the judgment? In other words, what type of rules relating to family reunion are covered? The test is whether the national rule makes family reunion difficult or impossible. This is apt to cover waiting periods, in-country applications, income requirements, fees for applications (see the Sahin judgment), age limits for spouses or children, and accommodation or sickness insurance rules. Furthermore, the standstill should equally apply as regards different categories of sponsors: for instance, more favourable rules that apply to groups such as refugees, long-term residents or highly-skilled workers cannot be made more restrictive either.  

Finally, what about the possibility of justification? The CJEU did not rule directly in this case as to whether prevention of forced marriages and integration were possible grounds of justification, although in Demir it ruled that prevention of irregular immigration could be such a ground. An example of a new rule which could surely be justified would be a ban on admission of family members if they have received a five-year prison sentence, as compared to a ten-year threshold previously. On the other hand, it seems doubtful that a national rule which simply aims to reduce the numbers of Turkish persons’ family members entering the country can be justified, in light of the overall objective of the association agreement of eventually providing for free movement of people and preparing for Turkish accession.

In any event, it is clear from the Dogan judgment that even if a new national restriction is justified, refusals cannot be automatic and must take account of individual cases. The requirement that the restrictions be ‘suitable’ also suggests that they must be the only possible means to achieve their end. More generally, it is surely the case that like any derogation from EU law, such restrictions and their application must also be judged in light of the EU Charter, namely the right to family life and rights of the child. 

Barnard & Peers: chapter 24, chapter 26

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