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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Irregular migrants and EU employment law

 

Steve Peers

What rights do irregular migrants have under employment law? It’s a vexed issue, because allowing irregular migrants to enforce employment law in their favour would arguably provide a ‘pull’ factor for them to enter and stay. On the other hand, if ordinary employment law applies to irregular migrants, then they will not be undercutting the legally resident workforce, and employers of irregular migrants will be deterred from employing them since they will not be saving money as a result.

The issue was addressed by the CJEU in today’s judgment in Tumer, concerning the application of the EU’s Directive on insolvency of employers to irregular migrants. In a bid to reduce the ‘pull’ factors of irregular migration, Dutch law specifies that irregular migrants cannot be considered employees for the purpose of the national application of the EU law. The result is that irregular migrants whose employer becomes insolvent cannot obtain the payments for back pay which the EU legislation provides for.

In this case, Mr. Tumer had initially resided legally in the Netherlands due to his marriage, but he was refused a continued residence permit after he got divorced. As a Turkish citizen, he arguably obtained rights based on the EU/Turkey association agreement, but the national court rejected his argument on this point and the CJEU refused to reopen the issue. Non-EU citizens can also obtain rights to stay after five years of lawful residence in accordance with the EU’s long-term residence Directive, but Mr. Tumer was divorced in 1996, well before that Directive had to be implemented (2006).

Despite not holding a residence permit, Mr. Tumer remained on the territory and worked for a Dutch employer. His employer became insolvent and he applied for the back pay which it had owed him from the Dutch fund set up to implement the insolvent employers Directive.

Judgment

The CJEU ruled first of all that the ‘legal base’ for the adoption of the legislation, the previous Article 137(2) EC (now Article 153 TFEU) was not limited to EU citizens only, ‘to the exclusion of third-country nationals’. Next, while the EU’s long-term residence Directive provided for equal treatment of long-term resident third-country nationals, this ‘in no way precludes other EU acts, such as’ the insolvent employers Directive, ‘from conferring, subject to different conditions, rights on third-country nationals with a view to achieving the individual objectives of those acts’.

As to the scope of this Directive in particular, the Court noted that it left it to national law to define the concept of ‘employee’. However, this discretion was circumscribed by provisions which limited the ability of Member States to remove certain categories of employees from the Directive, and specified that atypical workers (part-timers, fixed term workers, agency workers) had to be considered as employees. The Court pointed out that the Directive neither excluded third-country nationals from the scope of the Directive nor ‘expressly permit[ted]’ Member States to exclude them. Dutch civil law classified anyone with a ‘contract of employment’ as an ‘employee’ who was entitled to receive pay.

So, the Court reasoned, national discretion regarding the definition of ‘employee’ was circumscribed by the need to ensure that the ‘social objective’ of the Directive was obtained. So this meant that an ‘employee’ was in effect, defined by EU law, referring to ‘an employment relationship that gives rise to a right, vis-à-vis the employer, to receive payment for work done’. This definition corresponds to Dutch civil law. Denying any employees access to back pay when their employer became insolvent was ‘contrary to the social objectives of the Directive’. It was irrelevant that the person concerned was not entitled to work in the country, and Member States could not refuse to apply the Directive to irregular migrants on the basis that it expressly allows Member States to take measures to combat ‘abuse’.

Comments

This judgment is an important confirmation that EU employment law in principle applies to third-country nationals in general, including (but not limited to) irregular migrants. First of all, the Court stated for the first time that the legal base for EU employment law was not limited in scope to EU citizens only. It did not explain this interpretation in the light of the specific power (never used) in Article 153 TFEU to adopt legislation on the conditions of employment of third-country nationals, but it must be assumed from the judgment that the existence of this specific competence in no way limits the personal scope of any other EU employment legislation.

The impact of the Court’s ruling is clearly not confined to the insolvent employers Directive only. It refers very generally to the prospect of adopting ‘other EU acts, such as’ this Directive, which apply to third-country nationals. Logically, this means that other EU laws, such as consumer law, apply to third-country nationals too, since the Court did not suggest that its approach was limited to employment law.

Having said that, the Court clearly states that EU legislation could subject its application to third-country nationals to ‘different conditions’. What conditions are those? Its approach in this judgment indicates how the personal scope of EU legislation should be interpreted.

In Tumer, it’s crucial that the EU legislation in question doesn’t expressly exclude third-country nationals, or expressly permit Member States to do so. It does leave the definition of ‘employee’ up to national law, but the Court rules that this power is subject to satisfying the ‘social objectives’ of the Directive. Those social objectives don’t go as far as to permit exclusion of third-country nationals.

Applying these rules of interpretation to other EU measures, no EU employment legislation expressly excludes third-country nationals, or expressly permits Member States to do so; and surely it would always contradict the social objective of the legislation concerned to exclude from its scope third-country nationals in general, or irregular migrants in particular. The same could be said of other areas of law, such as EU consumer law. In contrast, the Treaty rules and legislation on EU citizenship and free movement of persons are limited to EU citizens and their family members.

This means that irregular migrants, as well as third-country nationals generally, can invoke any EU employment law, and many measures in other fields of EU law. However, the judgment doesn’t give  them rights to invoke the application of purely national employment law in areas not directly regulated by EU law, such as pay (in the absence of insolvency).

Having said that, equal treatment as regards other aspects of national law might be required by EU immigration or asylum law, depending on the specific rules in that legislation.  The long-term residents’ Directive, referred to by the Court, is not the only EU measure which confers equal treatment rights in that regard. While most of the measures in this area concern legal migrants, it is striking that the Court makes no reference to the 2009 Directive on employers of irregular migrants, which contains specific rules on this issue.

In principle, according to that Directive, irregular migrants are entitled to the normal rates of pay from their employer, and that Directive also requires that effective means must be in place to enforce this. The reason for this rule is to avoid employers gaining a benefit from their exploitation of irregular migrants, and the judgment in Tumeris entirely consistent with this logic. As the Commission recently reported, however, Member States have been fairly lax in enforcing these rules (see the analysis by Elspeth Guild earlier on this blog).  

In the event that the employer becomes insolvent, perhaps due to the various sanctions against employers of irregular migrants that the 2009 Directive provides for, then the employees could rely on the Tumer judgment to get any back pay from the national funds set up to implement the insolvent employers Directive. However, what happens if the insolvent employer of irregular migrants has not been paying them the normal wage, and/or not making payments into the national fund? Today’s judgment does not address that issue, which the Court of Justice will have to address if and when it arises.

 

Barnard & Peers: chapter 20, chapter 26

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The CJEU increases public access to legal advice on international treaties

Steve Peers

Introduction

The different approaches between the EU and the USA as regards data protection continue to result in considerable friction. Even before the Snowden revelations about the surveillance of EU citizens by the American security services, there were arguments about American access to airlines’ passenger name records and information about money transfers.

Both of these disputes were eventually solved by means of a treaty between the US and the EU regulating the USA’s access to such information. As regards money transfers, that access enables the USA to carry out its ‘Terrorist Finance Tracking Programme’ (TFTP). While the first version of the treaty regulating access to the TFTP data was rejected by the European Parliament (EP), a second version was approved after the text was amended.

After the CJEU’s recent judgments concerning data retention and Google Spain, and in light of the pending Europe v Facebookcase, it might now be questioned whether the EU/US treaties on passenger data and TFTP are invalid due to breach of the data protection rights guaranteed by EU law. However, that’s a topic for a future blog post.

In the meantime, the Court of Justice of the European Union (CJEU) ruled today on a related question. When the negotiations for the TFTP treaty were underway, the ‘legal base’ of the future treaty (ie, the precise EU powers to negotiate and conclude it) was disputed, and the Council’s legal service gave a legal opinion on this issue. A Member of the European Parliament (MEP), Sophie in’t Veld, requested access to the legal opinion and was refused, on the grounds that revealing legal advice relating to international negotiations would undermine those negotiations. She challenged this decision before the General Court, and was partly successful. 

The Council appealed that judgment to the Court of Justice, and has entirely lost in today’s judgment. While that judgment significantly increases public access to documents as regards legal advice, it still leaves intact the possibility of the institutions to refuse access as regards the substance of negotiations. 

The judgment

The EU’s access to documents legislation (Regulation 1049/2001) provides in principle for public access to EU documents. It contains exceptions allowing documents to be refused on grounds of (among other grounds) ‘international relations’ and ‘legal advice’. According to the General Court, the Council legal service’s advice on the TFTP treaty could be refused on the former ground, to the extent that it disclosed substantive details of the draft negotiating mandate, since this would damage the EU’s position by revealing it to the other side.  

However, to the extent that the legal advice did not reveal the EU’s substantive negotiating position, this ground for refusal could not automatically be applied. The General Court took into account the fact that an EP resolution had already made this particular legal base issue public, and that legal base disputes relating to international treaties can be the subject of advance rulings of the CJEU before those treaties come into force.

As regards this first issue, all of the Council’s objections to the judgment were rejected by the CJEU. The Court ruled that while legal advice relating to international treaty negotiations did not always have to be disclosed, it could not always automatically be refused either. Rather, the Council had to give reasons why disclosing the opinion to the public (after redacting all of the information relating to the substance of the negotiations) would undermine international negotiations.

Furthermore, the CJEU ruled that the General Court was right to apply a more stringent standard of judicial review as regards this issue as compared to the substantive negotiating mandate (where the EU courts would still leave a wide discretion to the EU institutions).

The second issue was the ‘legal advice’ exception. The CJEU had previously ruled, in the Turco case, that access to legal advice could only be exceptionally refused in legislative proceedings. By contrast, the negotiation of an international treaty is an executive power, conferred by the Treaties upon the EU Commission or the High Representative for EU foreign policy.

But nevertheless, the General Court had ruled that the legal advice exception could not be applied in this case either. The Council’s argument that it needed to keep legal advice secret to avoid embarrassment was too general and unsubstantiated. It was irrelevant that the legal advice concerned an international treaty, since the ‘international relations’ exception already addressed that aspect. Moreover, the EU legislation provides that the use of the ‘legal advice’ exception is subject to a public interest override. On this point, there was a close link to the EU’s legislative activity relating to police cooperation and personal data exchange, and waiting until the agreement was in force would rob public access to information of much of its purpose.  Again, all of the Council’s objections to the judgment were rejected by the CJEU.

Comments

In principle, this judgment could significantly open up the debate concerning the legality of planned international treaties. While the CJEU did not rule that legal advice in such cases should be disclosed as a rule (as legal advice relating to legislative procedures must), it is now clear that refusing access to such documents as a rule is a breach of the access to documents regulation. The Council (or Commission) must give detailed specific reasons to show why they think such documents should be refused because their release would undermine the conduct of negotiations in any specific case. This is obviously a difficult task, since to provide those reasons, those institutions would have to predict the hypothetical actions of third States without disclosing to the applicant much of the details.

Moreover, they must consider the public interest in access to that legal advice. The General Court’s further reasoning on this issue wasn’t expressly endorsed by the CJEU, but neither did the CJEU disavow it. So it is arguable that whenever there is a link between the treaty negotiations in question and the EU’s legislative activity, and/or the treaty in question touches upon an issue of broad public concern like data protection, then the public interest overrides the Council’s.

On the other hand, unlike the position as regards the EU legislative process, the CJEU has left intact wide discretion for the institutions to refuse to disclose their negotiating position, and therefore any details of that position in the legal advice can be redacted. Since there is an obvious close link between the legal advice and the substantive position, it remains to be seen whether the documents will still be intelligible.

Will the release of such documents damage the EU’s negotiating positions as regards international treaties? In the case of the USA, surely it has seen all the documents anyway, due to the efficiency of its espionage agencies. That will also be the case, to some extent, with some or all of the other countries the EU negotiates with.

As for the European Parliament, the Treaty anyway guarantees it information on all ongoing negotiations, and the CJEU has recently confirmed that this is an enforceable right. However, it is not yet clear how far that right extends, and in particular whether it extends to negotiating mandates. In any event, it is clear from the judgment that if the EP hears about a legal dispute concerning a planned treaty, and decides to make that dispute public by referring to it in a resolution, the Council’s argument that the legal advice cannot be disclosed is significantly weakened.

Another reason for the secrecy of the EU’s international negotiations may be to avoid complications arising from public debate. However, this strategy is largely self-defeating, since the secrecy itself engenders great suspicion from critics about what the EU and its negotiating partners might be planning, and so may fuel opposition to the eventual treaty (if the negotiations are successful). A clear case in point is the current talks on an EU/US free trade agreement.  

It is true to say that this process is ultimately democratic, since all international treaties agreed by the EU and third States then have to be approved by the Council, and most have to be approved by the European Parliament and often also national parliaments. However, it is not democratic in the full sense of the term, since there is a very limited opportunity for and open and public debate (as compared to the legislative process) before the negotiations have concluded.

Today’s judgment has opened up that debate somewhat, by making it easier to make a successful request for the legal advice relating to such negotiations. Sometimes the legal advice may relate to broad issues of public concern, such as human rights protection, but sometimes it will relate to more technical institutional points. The latter points could still be relevant politically, since they could determine (for instance) how much power Member States or the EP have to block a treaty if they object to the substance of it.

But overall, the judgment will not satisfy the demand for greater openness of the treaty negotiation procedure, and so the paradoxical effect of secrecy breeding opposition to treaties will continue. For those who seek greater public involvement in the process, getting access to more information on legal advice but no further information on the substance of the talks is like being served a salad when they are hungry for steak.

Barnard & Peers: chapter 3, chapter 24 

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The CJEU ensures basic democratic and judicial accountability of the EU’s foreign policy

 

Steve Peers

In today’s judgment in European Parliament v Council, the Court of Justice of the European Union (CJEU) has ensured that a minimum degree of democratic and judicial scrutiny applies to the EU’s Common Foreign and Security Policy (CFSP).

The European Parliament (EP) was challenging the Council’s decision to sign and conclude (ie, ratify) a treaty between the EU and Mauritius, relating to the EU’s military operation as regards pirates in the Indian Ocean. As discussed further in the previous blog post concerning the Advocate-General’s opinion, one important aspect of this treaty (and similar treaties with other nearby States) was the inclusion of rules governing the transfer, trial and treatment of alleged pirates to Mauritius, once the EU caught them.

The dispute had two elements – substantive and procedural – which will be considered in turn.

Substantive issues

In the Council’s view, this treaty ‘exclusively’ concerned the CFSP. In that case, Article 218 TFEU (the clause which sets out the procedures for negotiating and concluding international treaties by the EU) states that the EP does not even have to be consulted. But in the EP’s view, it had the right of consent over this treaty, since it also touched upon issues of development policy and criminal and police cooperation. Article 218 provides that where a treaty concerns issues where the EU’s ordinary legislative procedure applies (such as those policy areas), the EP has a right of consent before a treaty can be concluded.

The Court assumed that the EP was not actually arguing that the EU/Mauritius treaty should also have been adopted by means of the development policy, police and judicial cooperation legal bases. So therefore it confined itself to ruling on a narrow legal point. Article 218 states that when a proposal to negotiate a foreign policy treaty is first made to the Council, the Commission and the High Representative for the CFSP shall make recommendations where that treaty relates ‘exclusively or principally’ to the CFSP.

But the CJEU ruled that the different wording (‘exclusively or principally’ when recommending a negotiation, and ‘exclusively’ when concluding a treaty) was immaterial. In its view, the basic rule in Article 218 is an underlying parallelism between the internal powers of the EP and its external powers. So where it has an internal power of consent and control (for instance, pursuant to the ordinary legislative procedure), the EP should have a corresponding external control over the conclusion of treaties.

This approach inevitably meant that the EP lost its substantive argument, since Article 36 TEU only gives the EP the power to be informed and consulted of the main elements of the CFSP.

The Court’s analysis contrasts with that of the Advocate-General, who assumed that the EP was arguing that the treaty should have had also the legal bases regarding development policy and police and judicial cooperation. (His interesting arguments were fully discussed in the previous blog post).

Procedural issues

The EP’s procedural argument was based on a new clause added by the Treaty of Lisbon (Article 218(10)), which states that the EP ‘shall be immediately and fully informed at all stages of the procedure’. In this case, the Council had informed the EP of its decision to sign and conclude the agreement over three months after it had taken it.

But before the Court could rule on the merits of this argument, it had to rule on whether it had jurisdiction to consider it. Article 275 TFEU rules out the Court’s jurisdiction as regards the CFSP, except as regards sanctions on individuals or ‘legal base’ arguments.

Nevertheless, the Court asserted its jurisdiction, arguing that the rule in the Treaty was its ‘general jurisdiction’, and so Article 275 was a ‘derogation’ which had to be ‘interpreted narrowly’. So the Court did have jurisdiction to consider issues of procedure as distinct from substance, since the procedural legal basis for CFSP treaties is Article 218, ie a provision outside the scope of the CFSP rules as such.

The Court then ruled in favour of the EP’s main argument.  Unlike the Advocate-General, it reached the common-sense conclusion that a three-month delay in informing the EP did not constitute ‘immediately’ informing it. Publishing the treaty in the Official Journal was not enough, since the purpose of the information requirement was to ensure ‘democratic scrutiny’ by the EP, including as regards legal base issues. The failure to inform the EP was an ‘essential procedural requirement’, ie a ground to annul the act concerned under Article 263 TFEU, since it was ‘an expression of the democratic principles on which the [EU] is founded’.  

This information requirement applied even though the treaty in question concerned the CFSP, where the EP had no power of consent or even consultation. The Court emphasised that the information requirement applied to any sort of treaty, and to any stage of the procedure.

Comments

If the EP had won its argument on the substantive issues, it would have gained the power of consent over most foreign policy treaties, given their links (which the Treaties in fact require) with other aspects of EU external policies. It does appear that the EP was trying to argue a more general legal base point, and so the Court’s decision to confine itself to a more technical analysis is disappointing. If the Court had ruled on the substantive legal base arguments, it would have been its first clarification of the external scope of the EU’s policing and criminal law powers, and its first clarification of the scope of CFSP powers since the Treaty of Lisbon came into force. So the missed opportunity is unfortunate. Perhaps next time, the EP will challenge a foreign policy treaty more unambiguously, so that its legal base arguments are decided on the merits.

It could have been argued that the exception (as regards CFSP) to the normal rule that the EP has consent or consultation powers over international treaties is also a ‘derogation’ from the normal rule which had to be ‘interpreted narrowly’, just like the rule limiting the Court’s CFSP jurisdiction. However, the Court adopted different rules of interpretation as regards these two issues. One could deduce that the Court is more concerned about asserting its jurisdiction than enhancing the EP’s rights.

But having said that, the Court’s ruling on the procedural point is quite significant. First of all, as regards its own jurisdiction, the Court’s ruling means that any CFSP measure can be litigated before it, as long as the legal arguments relate to a procedural rule falling outside the scope of the CFSP provisions of the Treaty (Title V of the TEU). For instance, it arguably means that the Court would have the power to rule on the compatibility of proposed CFSP treaties with EU law, since that jurisdiction is conferred by Article 218 TFEU and not expressly ruled out by Article 275. But such disputes might often include arguments about the substanceof the measure concerned (for instance, whether it would breach the EU’s human rights obligations), and it could be awkward to distinguish between procedural and substantive issues in practice.

Secondly, as for the EP’s information rights, the Court’s reference to ‘all types of procedures envisaged in Article 218’ surely means that the EP must be given information at least about the recommendations to start negotiations, the decisions to open negotiations, the negotiating directives, the suspension of agreements and the adoption of EU positions in bodies set up by agreements, since all of those measures are referred to in Article 218. This allows the EP to indicate its point of view on draft or planned treaties or measures implementing them at an early stage of the process, allowing for further democratic input into the treaty-making process.

More broadly, the CJEU quite rightly rejected the absurd view that a three month wait could constitute an ‘immediate’ notification.  It applied the literal interpretation of the Treaty rule (applying to all treaties, and to every stage of the procedure) as well as the purposive rule (advocated in the previous blog post), agreeing that the purpose of the rule was to ensure democratic scrutiny and to allow the EP to ‘make known its views’. As I previously pointed out in that blog post, such public scrutiny would be an opportunity to discuss, for instance, whether the country in question had a problematic human rights record, and therefore to influence public debate over whether the treaty in question ought to be concluded.

 

Barnard & Peers: chapter 5, chapter 24, chapter 25

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The CJEU enhances the EU’s role as an external actor

Steve Peers

In today’s judgment in Commission v Council, the CJEU ruled that the EU’s partnership treaties with third States must be adopted using EU powers relating to development and trade (common commercial policy) even if those treaties include provisions relating to transport, the environment and readmission. Due to its broad concept of development policy, the Court’s judgment will entail an increase in the EU’s ability to obtain its external policy objectives.

Background

The EU has been signing development policy treaties (and adopting development policy legislation) for a long time, but its formal powers in this field date back to the original TEU (Maastricht Treaty), in force in 1993. When adopting development policy measures, the Council votes by a qualified majority, meaning that a Member State might be outvoted.

There have been several ‘generations’ of EU development policy treaties, each of them wider in scope than the last. The key previous ruling on the scope of the EU’s development policy is a 1996 CJEU ruling concerning an agreement with India. In the Court’s view, the concept of development policy was a broad one, extending beyond the traditional sphere of poverty relief to such areas as energy and culture, as long as the relevant provisions of the treaty did not set out ‘concrete obligations’. If they did, then other EU legal bases, possibly entailing unanimous voting, or the participation of the Member States in the treaty might be required.

Since then, there is another new generation of EU development treaties (now called partnership agreements), extending even further in scope. Member States have insisted that these treaties need their involvement alongside the EU, and also that the treaties concerned need other legal bases to  be adopted.

While today’s judgment concerned a treaty with the Phillippines, the EU has also agreed or is negotiating similar treaties with many other Asian countries, most notably China.

The judgment

According to the Court of Justice, the provisions in the partnership treaty concerning transport and the environment are essentially ‘declarations’, and so do not entail concrete obligations. So the development policy legal base is enough to cover them.

Furthermore, the Court ruled that the treaty provisions on readmission fell within the scope of development policy. This was because while although the commitment in the partnership agreement to accept each party’s own nationals who were present without authorisation, and to negotiate a treaty to this effect, was binding, it was not sufficiently detailed to constitute a ‘concrete obligation’.

Comments  

The consequence of the judgment is that partnership agreements with similar clauses cannot any longer be subject to separate decisions approving them as regards immigration issues, due to the opt-outs of the UK, Ireland and Denmark on such issues. Therefore this judgment continues a general trend in which the Court narrowly interprets the terms of these opt-outs (see the previous posts regarding recent judgments on social security and transport safety). This limitation of the opt-out is the most obvious consequence of the judgment, since the voting rule in Council and the involvement of Member States in signing the treaty were not contested.

However, this is a distinct question from whether EU association agreements need to be subject to the same procedure for separate decisions (which is currently the case) if they contain such clauses on immigration issues. But the case for separate decisions as regards the immigration provisions of association agreements has obviously been weakened by analogy by this judgment. It should be noted that the Court found that all of the ‘migration management’ provisions of the partnership treaty, not just the specific provision on readmission, fell within the scope of the development policy powers.

The Court’s ruling as regards the transport and environment provisions is unsurprising, in light of the previous judgment on the scope of development policy (which the Court reaffirmed). Furthermore, it would be possible, in light of the Court’s ruling on the immigration issues, to include in partnership agreements some specific commitments as regards (for instance) signing further treaties on climate change or aviation liberalisation, since they would not constitute a concrete obligation.

The judgment is more questionable as regards readmission. The Court rightly did not accept the Advocate-General’s opinion that a merely political link between readmission and development was sufficient to bring the former issue within the scope of the latter. Rather, it narrowed the scope of the notion of a ‘concrete obligation’, thereby widening the scope of the notion of development policy. So a legal commitment is not necessarily a concrete obligation: it depends on how specific that commitment is.

More broadly, arguably this judgment opens up scope for the EU to insist on more specific human rights obligations as part of its partnership agreements. An obligation to sign key human rights treaties, and/or to pass certain legislation improving human rights domestically, is arguably not concrete enough within the meaning of this judgment.

Overall, the consequence of this judgment is that the EU’s development policy is broader than had previously been understood to be the case, with the result that the EU can insist upon more obligations on behalf of its partners without this entailing institutional complications on the EU end. The Court’s judgment therefore makes it easier for the EU to insist that more countries adhere to its external policy objectives, and so makes the countries‘ development more conditional upon compliance with the EU’s goals.

Barnard & Peers: chapter 24, chapter 26

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Bad drivers and EU law: The CJEU drives on the wrong side of the road

Steve Peers

There’s an old Canadian joke, which was once voted the ‘Most Canadian Joke Ever’ (mind you, it might not have faced much competition). An American, a Canadian, a Brit and a Frenchman walk into a bar. The barman (bizarrely) asks them each to write an essay about an elephant. The Frenchman writes about the elephant’s sex life. The Brit writes about the role of the elephant in colonial history. The American writes about the military use of the elephant (or perhaps, now, about the use of elephants to intercept telecommunications). And the Canadian writes: “The elephant: Does it fall within federal or provincial jurisdiction?”

Now, let’s add an EU law element. Say this group of boozy essay-writers is gathering in a bar in Luxembourg. An EU lawyer joins them. Inevitably, she writes her essay on ‘Which Treaty legal base regulates elephants?’ In fact, this is a genuine legal dispute, at least as regards trade in endangered elephants (does the Treaty rule on environment or on the common commercial policy apply?). And finally, the EU lawyer has brought along her German friend. He only agreed to come because the EU lawyer promised him that everyone would pay for their own drinks. But when he gets to the bar, he finds that the EU lawyer has successfully convinced everyone in Luxembourg that he has to pick up the whole tab for the evening.

While disputes over legal bases might appear to be a particularly arcane feature of EU law, they are usually manifestations of important disputes about how political power is exercised at EU level. Most often, the legal base dispute is really about the extent of the legislative power of the European Parliament, and/or the extent of Member States’ veto powers.

Today’s judgment on the legal base of the Directiveon the exchange of information on driving offences is about two other issues, however: the extent of the Commission’s monopoly of initiative, and the scope of the opt-outs relating to EU Justice and Home Affairs (JHA) law.

This particular Directive was first proposedby the Commission back in 2008, with a legal base relating to transport. Discussions on this proposal were soon blocked by disputes as to whether it should instead have a legal base relating to police cooperation – which would then have entailed unanimous voting and mere consultation of the European Parliament (EP). However, following the entry into force of the Treaty of Lisbon in 2009, the decision-making procedure relating to transport law, on the one hand, and (most) EU rules on police cooperation, on the other hand, were governed by the same decision-making rules (the ordinary legislative procedure) as far as the Council and EP were concerned.

But two differences remained: the Commission shared its power of initiative with groups of Member States as regards criminal and police cooperation measures, but not as regards transport law (or any other aspects of EU law); and the UK, Ireland and Denmark have opt-outs from the former area of EU law, but not from transport law.

The Belgian Council Presidency, in the second half of 2010, relaunched discussions o the Commission’s proposal and soon reached an agreement in the Council. The following Presidency reached an agreement with the EP, and the Directive was adopted in 2011. The UK and Ireland chose to exercise their opt-out, while Denmark was automatically excluded.

In a nutshell, the Directive sets out a process for exchange of information between Member States as regards specified common driving offences, such as speeding and drunk driving. The subsequent use of that information is then left to the discretion of the State which has received it.

The CJEU’s judgment

The CJEU ruled entirely in favour of the Commission, holding that the Directive concerned only transport issues. However, it kept the Directive in force for a year, placing the EP and the Council under an obligation to negotiate a new text by the end of that period. The new measure will obviously apply to all Member States, given the absence of any opt-outs relating to transport matters.

According to the Court, applying the usual rule of examining both the aim and content of EU measures to determine their correct legal base, both the aim and content of this Directive concern transport policy. First of all, its aim was to ensure a high degree of road safety, and the prior CJEU case-law had established that road safety was an aspect of the EU’s common transport policy. As the Court pointed out, the Directive applied regardless of whether the offences were regarded as administrative or criminal under national law. It aimed to ‘induce more cautious behaviour’ by drivers, ‘thereby helping to reduce the number of casualties due to road traffic accidents’.

As for the content of the Directive, it regulated the access to vehicle registration data by each national authority, as well as the notification to the drivers concerned. It also provides for possible further proposals by the Commission in 2016: this is a veiled reference to reviving the Commission’s previous controversial proposals to harmonise the law on drunk driving across the EU (ie, setting a standard maximum level of blood alcohol content). So the Court ruled that the content of the Directive also pursued the objective of road safety.

The Court then rejected the argument that the Directive fell within the scope of the legal base on police cooperation. While the EU powers on this issue have a wider scope since the Treaty of Lisbon entered into force, this cooperation is still limited to cooperation by police and other law enforcement authorities as regards ‘the prevention, detection and investigation of criminal offences’ (Article 87(1)). Also, the police cooperation legal base had to be interpreted in light of the general objectives of EU JHA law, as set out in Article 67 TFEU, which include ensuring ‘a high level of security’ by means of ‘coordination and cooperation’ between police and other authorities, as well as criminal law measures.

Comments

With great respect, the Court’s judgment is not convincing; but neither is the argument defended by the Council and the EP, which was supported by seven Member States and Advocate-General Bot.

As for the judgment, while the Court is correct to say that the aim of the Directive is road safety, its analysis of the content of the Directive is problematic. In those Member States which enforce some or all of the driving offences in question by means of criminal law, the process of exchanging information set out in the Directive has the purpose of facilitating the application of prosecution and criminal penalties as regards the persons concerned. The Court ignored the Advocate-General’s point that the Directive draws upon the EU’s ‘Prum’ system for the exchange of information between police authorities.

While it is arguable that the Court was drawing a distinction between the exchange of information and the subsequent criminal process, such a distinction would not be convincing. The two aspects of criminal law are closely linked, and Article 87 TFEU expressly refers to the exchange of information.

In fact, the Court does not seem to draw such a distinction, relying only upon the aim of securing road safety, and the fact that exchange of information (the content of the Directive) supported this aim. This could be understood to mean that even a measure about the mutual recognition of criminal penalties relating to road traffic offences (such as the existing Framework Decision, referred to by the Advocate-General) falls within the scope of EU transport law, at least as far as transport is concerned. Moreover, logically this approach applies by analogy to criminal law measures related to other aspects of EU law, such as the internal market. As the Advocate-General pointed out, the existence of Article 83(2) TFEU, which provides for the power to adopt substantive criminal law relating to other EU policies, proves that ‘the border is not sealed’ between criminal law and the rest of EU law.

The Court’s reliance upon Article 67 TFEU is not convincing either. In fact, that provision is less precise than the legal base of Article 87, referring generally to ‘cooperation and coordination’, and not restricting the scope of the policing and criminal law aspects of the JHA Title expressly to criminal offences.

This brings us to the central flaw of the alternative argument. Both the Advocate-General and the EP stated that Article 87(1) TFEU was not limited in scope to ‘criminal matters’. No, but it is expressly limited in scope to ‘criminal offences’. (The Advocate-General went so far as to quote the wording of Article 87, leaving out these final two words). While some Member States apply criminal law to road traffic offences, others do not. This distinction is surely recognised by Article 67(1) TFEU (not quoted by the CJEU), which states that EU law on JHA matters must respect ‘the different legal systems and traditions of the Member States’.

The Council’s arguments did accept that the EU police cooperation measures had to be linked to criminal law, but asserted that ‘criminal’ law had a wide meaning, and that administrative procedure had to be regarded as criminal procedure. These arguments ignore the diversity of the Member States’ traditions in this field.

What approach should the EU legislature – and the Court – have taken? The Court’s analysis is flawed because it ignores the link between criminal law and road traffic offences in many Member States, while the Council and EP ignored the role which administrative law plays in many others. There is a way in which the EU could have attempted to deal with the issue of road safety, while taking account of the diversity of Member States’ systems. It could have adopted parallel measures relating to the different approaches to this issue, as it did when it adopted a Regulation on the civil law aspects of victim protection orders, following a Directive on the criminal law aspects of this issue.

Finally, as for the UK, its determination to opt out from this measure (which has now been frustrated by the Court) is hard to explain. Officially, at least, the UK opted out of the measure because it would was not consistent with the system applied in the UK (see the government’s explanationto the House of Commons EU Scrutiny committee). But the better course would have been to attempt to negotiate, within the context of the legislation, a different model for the exchange of information which (in accordance with Article 67 TFEU) took account of the specificities of the UK system but which still ensured that the valuable objective of the legislation would be secured in the UK. After all, surely UK citizens also quite rightly feel (in the Advocate-General’s words) ‘the sense of injustice that can arise from the impunity’ of foreign drivers not being penalised for road traffic offences committed in the UK.

One can only hope that the government did not opt out of the proposal purely in order to boast to those who oppose any EU role in criminal law under any circumstances that it had secured yet another opt-out. The safety of British drivers and pedestrians should not be undermined by the political objective of putting another notch in a Eurosceptic bedpost.


Barnard & Peers: chapter 5, chapter 25

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