Accessing the EU’s Financial Services Market in the Event of a No-deal Brexit

Bartlomiej Kulpa, LLM (Twitter: @KulpaBart)

Introduction

Since Boris Johnson took the helm as British Prime Minister, a no-deal Brexit has become the most likely scenario. The UK-based financial services firms are waiting to hear if they will be able to serve clients in the EU 27, and if so, on what basis. Currently, the UK-based financial services firms rely on the so-called passporting rights. According to The Economist, 5,476 financial services firms based in Britain used 336,421 European passports to sell their products in the EU in 2016. By comparison, approximately 8,000 financial services firms based in the EEA used 23,535 European passports to sell their products in the UK. This proves that the removal of passporting rights as well as uncertainty over what will replace them amount to an existential threat.

The Concept of a European Passport             

A European passport is a right granted under the Single Financial Market Directives, such as MiFID II (The Markets in Financial Instruments Directive 2014/65/EU), to an EEA institution licenced in an EEA Member State. The European passport enables financial services firms to act on a cross-border basis within the EEA. If Britain leaves the EU without a Brexit deal, the UK-based financial services firms will lose the passporting rights and consequently full access to the single market. In other words, they will be treated as third country financial services firms.  

   

Articles 34 and 35 of MiFID II form the legal basis for the passporting rights. Article 34 provides for freedom to provide investment services and activities in another Member State if such investment services and activities are authorised by the competent authorities of a home Member State. As regards Article 35, that allows financial services firms to provide services in another Member State through the right of establishment of a branch provided that such services are authorised by the competent authorities of the home Member State. Pursuant to Articles 34 and 35, a financial services firm must notify the competent authorities of the home Member State of its intention to provide services in another Member State. In other words, the financial services firm must apply for a licence. Subsequently, the competent authorities of the home Member State inform the competent authorities of a host Member State of the financial services firm’s intention to serve clients in the latter.    

  

There is no doubt that the advantages of the concept of a European passport easily outweigh the disadvantages. Firstly, one licence enables financial services firms to obtain access to 31 countries which have a population of over 500 million consumers (this will be reduced after a Brexit). From a legal point of view, this means that a financial services firm that has been granted a European passport is not required to obtain a domestic licence in every Member State. Secondly, the concept of a European passport helps to keep business costs down. Thirdly, the concept of a European passport is free from political influence. Fourthly, the range of clients and investors is not limited in scope. In other words, the concept of a European passport does not only apply to professional investors but also to retail investors. Lastly, a home Member State regulator cannot revoke the European passport and the European passport is granted for a period of time with no fixed limit.

Further, it should be noted that the concept of a European passport does not have the qualities to be described as a single European passport. If it qualified as the single European passport, then financial services firms would be allowed to undertake cross-border activities throughout the EEA without taking any further actions. A good example of a single administrative act with EEA-wide effect is a European trademark granted by the European Union Intellectual Property Office (EUIPO).

The Equivalence Regimes       

The EU has operated the equivalence regimes (also known as the third country regime or TCR) in relation to financial services firms based outside of the single market under the relevant Single Financial Market Directives and Regulations, the USA being the prime example, for some years. In accordance with Articles 46-49 of MiFIR (The Markets in Financial Instruments Regulation (EU) No 600/2014), the equivalence regime is based on an equivalence decision made by the European Commission (EC) and the register of third country financial services firms kept by the European Securities and Markets Authority (ESMA). As regards the former, the EC’s equivalence decision states whether, firstly, the prudential and business conduct requirements that are legally binding in a third country have equivalent effect under EU law and whether, secondly, the legal and supervisory arrangements of the third country ensure that financial services firms authorised by the competent authorities of that third country comply with the legally binding prudential and business conduct requirements. Once the EC has made the equivalence decision in favour of a particular third country, financial services firms based in that third country need to register, within a transitional period of three years under Article 54 of MiFIR, with the ESMA. As a result, third country financial services firms are able to operate as a European hub. It should be noted that Member States shall not impose any additional requirements on such firms and shall not treat them more favourably than firms based in the EU.       

Moreover, it should be emphasised that the equivalence regime enables third country financial services firms to provide investment services and activities only to eligible counterparties and professional clients. This means that, unlike the concept of a European passport, the equivalence regime does not apply to retail clients. What is more, the EC can revoke an equivalence decision at any time if divergences between a regulatory framework of a third country and the regulatory framework of the EU appear.

One could argue that in the event of a no-deal Brexit the equivalence regime would be more attractive for smaller financial services firms. As practice proves, multinational financial services behemoths, which have used Britain as the gateway to the single market, have already relocated to the EU 27 or are in the process of setting up offices there as part of their Brexit strategy.

As far as the resolution of disputes is concerned, third country financial services firms shall, before providing any services or activities to the EU-based clients, offer to submit any disputes relating to the aforementioned services or activities to the jurisdiction of a court or arbitral tribunal in one of the Member States (Article 46(6) of MiFIR). In other words, such firms shall offer a forum in the EU where their right to conduct litigation could be exercised. If Britain were to access the single market via the equivalence regime in the event of a no-deal Brexit, then the English courts would not have any jurisdiction over disputes relating to such services or activities. In practice, this would result in London facing a struggle to retain its position as a global centre for securities litigation.         

Although the equivalence regime would allow the UK-based financial services firms to access, in the event of a no-deal Brexit, the single market, the equivalence regime suffers from a few drawbacks. Firstly, the equivalence regime is a unilateral mechanism. To put it simply, it only depends on the EU whether it recognises as equivalent the regulatory standards of a third country. Secondly, since an equivalence decision is made by a political body, namely the EC, various political factors can impact the equivalence assessment. Thirdly, the EC’s equivalence decision cannot be reviewed by a court.

        

The European Passport Light

The next issue that merits attention is the so-called ‘European passport light’ as set out in Article 47(3) of MiFIR. A third country financial services firm can rely on the European passport light if the following conditions have been met: (i) the EC has made an equivalence decision in favour of a particular third country; and (ii) the third country financial services firm has been granted the authorisation to establish a branch in one of the Member States pursuant to Article 39 of MiFID II. As a result, the third country financial services firm will be able to provide services and activities to eligible counterparties and professional clients in other Member States without the requirement to establish a new branch for each additional Member State. In the same way as the equivalence regime, the European passport light does not apply to retail clients. However, unlike the equivalence regime, the European passport light is not based on the requirement to register with the ESMA.         

  

The MiFID II Own Initiative Principle

Article 42 of MiFID II creates an exception to a Member State’s imposition of an authorisation requirement, which is enshrined in Article 39 of MiFID II, for a third country financial services firm where that firm provides investment services or activities at the exclusive initiative of a retail or professional client. The MiFID II Own Initiative Principle is coterminous with the reverse solicitation test. Compared to the equivalence regime, the MiFID II Own Initiative Principle applies to retail as well as professional clients. However, from a practical point of view, the MiFID II Own Initiative Principle does not seem to be useful for big financial services firms that intend to actively gain a market share. Furthermore, any marketing to EU-based clients triggers the EU rules for providing financial services and consequently the need for obtaining an EU licence.    

  

Conclusion

It seems that the equivalence regime is the only workable arrangement that could replace the concept of a European passport in the event of a no-deal Brexit. Unless the UK government creates ‘Singapore upon Thames’, the process of making a decision whether post-Brexit Britain’s regulatory regime is deemed to be equivalent should be relatively straightforward. However, one should remember that the equivalence regime does not apply to retail clients and the EC can revoke an equivalence decision at any time. Therefore, the equivalence regime would not fill the gaps created after the cessation of the application of a European passport to the UK-based financial services firms.

Further reading:

M Lehmann and D A Zetzsche, Brexit and the Consequences for Commercial and Financial Relations between the EU and the UK, 20 September 2016. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2841333;

H Nemeczek and S Pitz, The Impact of Brexit on Cross-Border Business of UK Credit Institutions and Investment Firms with German Clients, 1 February 2017. Available at: https://ssrn.com/abstract=2948944;

The Economist, London’s reign as the world’s capital of capital is at risk, 29 June 2019. Available at: https://www.economist.com/finance-and-economics/2019/06/29/londons-reign-as-the-worlds-capital-of-capital-is-at-risk.              

Barnard & Peers: chapter 14, chapter 27

Photo credit: via Wikicommons, photo taken by Andy F

Why Uber isn’t Appy: the ECJ defines the difference between transport and digital services

Lorna Woods, Professor of Internet and Media Law, University of Essex

The Court of Justice has followed its own established tradition and given us a significant judgment just shortly before a holiday break, perhaps in the hope that any emotionally driven (negative) response will have gone away by the time every one has got back to work. Last year we had Tele2/Watson (discussed here); this year it is Uber. The Court, in a relatively short judgment, seems to have followed its Advocate General (discussed here) - at least in outcome - to find that Uber provides a transportation service that may be regulated by the relevant Member State. While Uber may suggest at least in media reports that this ruling is not that significant to its business, the ruling may be the subject of some scrutiny by legal advisors to intermediation services to understand precisely the point at which such services are no longer to be considered information society services (within the eCommerce Directive) and what they might be considered to be instead.

To understand the significance of the judgment at this point, it is necessary to have some awareness of the patchwork of EU legislation potentially covering these services. The eCommerce Directive provides the framework for online businesses and famously provides the safe harbour provisions for those providing some forms of intermediation services: mere conduits; providers of caching services; and hosts. This directive also provides for regulation in place of establishment within the field of the directive, and limits the sorts of regulation that may be allowed. Specifically licensing for the service is not permitted.

The Services Directive provides a similar approach, but certain sectors are excluded (gambling as well as transport, for example) and may therefore be subject to more detailed regulatory systems. Broadcasting (audiovisual media services) are subject to a separate regime too, which specifies certain rules about the content that may be provided on such services.

In sum, the categorisation of a service into a particular category affects the extent to which those services may be subject to regulation. The providers of electronic intermediation services have to date benefitted from a regulatory approach which not only limits regulation but in some instances protects them also from liability in the interests of developing the market in such services.

What we see with Uber, and other intermediation services, is not just the connection of two individuals or entities who want to contract with one another but the creation of that circumstance as well as the control over the terms on which that business is carried out. Essentially, the question before the Court was whether such behaviour was just about providing technical services (an app) or whether the control was such that the intermediary had gone beyond intermediation and at what point that boundary was overstepped. 

The Court here confirmed that, in principle, a service providing information from one party to another would fall within the eCommerce Directive as an information society service (though it did not provide the detailed analysis of the Advocate General); taxis are by contrast transportation services. The service provided by Uber was more than "an intermediation service consisting of connecting, by means of a smartphone application, a non-professional driver using his or her own vehicle with a person who wishes to make an urban journey" (para 37).

From the Court’s perspective, it seems that there are three elements – though their interrelationship is not clear:

That the services be integral to the provision of other services (para 40);

The market creation aspect (para 39) – that is the service providers would not provide the service without the platform’s intervention (in the Court’s words the service providers were ‘led’ to do this); and

The decisive influence by the platform over the conditions under which that service is provided (para 39).

Given the structure of the Court’s judgment (and its use of the word ‘thus’ at the beginning of para 40), it could be argued that the over-arching concern is that identified at (1), but that the issues identified at (2) and (3) help identify a services integral nature. Whether, however, both market creation and control of conditions are necessary.  The Court did not make this point express but merely listed them as factors in this instance; in this there is a similarity to the Opinion of the Advocate General. 

As previously noted, this issue may have consequences for other platforms in the sharing economy and whether they are seen as part of the service that they facilitate. In essence we are seeking to place these platforms on a scale between bulletin board, client management system and agency.

The Court did not expressly consider a point which was central to the reasoning of the Advocate General – that is, the question of whether the two elements could be seen as economically independent of one another (in which case, they should be viewed separately).  One response would be to note that the Court has talked of the electronic communications aspect being integral to the overall service. The terrain described by points 2 and 3 above however is not exactly that of economic interdependence, though the Court suggests as the Advocate General argued that the economic activity is taking place only because of the role played by the platform. 

Does this then suggest that there is a difference between service which amateurs are encouraged to supply and those supplied by those professionally so engaged? This distinction may not make much sense in the context of the gig economy and piecework systems of what is de facto employment.

By contrast to the Advocate General, the Court – after concluding that neither the eCommerce Directive nor the Services Directive was applicable to Uber’s app – took the view that the app was part of a service in the field of transport since that concept “includes not only transport services in themselves but also any service inherently linked to any physical act of moving persons or goods from one place to another by means of transport” (para 41). 

Consequently, the Court avoids having to follow the reasoning of the Advocate General to find Uber responsible for the taxi drivers, instead going straight to the point that Member States may regulate the circumstances in which such intermediation takes place (para 47). This seems a more logical consequence of the reasoning than the somewhat artificial distinction that the Advocate General made between app and taxi service. It does mean, however, that those providing apps to facilitate the provision of services may find themselves having to look to the regulatory framework for that particular service, rather than the regulatory framework for electronic communications.

Barnard & Peers: chapter 14

Photo credit: The Independent

The Future of EU External Trade Policy - Opinion 2/15: Report from the Hearing

David Kleimann and Gesa Kübek*

On September 13 and 14, the Court of Justice of the European Union (CJEU) held its hearings for Opinion 2/15, which concerns the EU’s competence to conclude the recently negotiated EU-Singapore Free Trade Agreement (EUSFTA). The CJEU convened in a rare sitting of the Full Court of CJEU judges. It was presided by Judge Lenaerts and Vice-President Tizzano, with Judge Ilešič fulfilling the function of the Court’s Rapporteur. Mrs. Sharpston serves as Advocate General.

This note offers a first-hand report on the hearing and summarizes the exchange of arguments between the Commission, on the one side, and the Council and the member states, on the other side. The first section sets the stage by providing relevant contextual information to the proceeding and highlights the systemic importance of the coming judgment. Section II first outlines the main and general lines of reasoning that the parties presented during the hearing. Secondly, we highlight a selection of policy specific, novel, or even ‘curious’ legal arguments that were advanced by the representatives of the Council and the Commission on the one, and the members of the Court, on the other hand. Section III concludes this note with one of many still unanswered, yet systemically highly significant legal questions that surfaced in the course of the oral phase of the proceedings. There's some further background to the case in an earlier post on this blog.

I.                   The Crux of Opinion 2/15

“Does the European Union have the ‘requisite competence’ to conclude the EU – Singapore Free Trade Agreement [EUSFTA] alone?” More specifically, the Commission, in October 2014, had asked the Court to clarify whether and which areas of the EUSFTA fall under EU-exclusive, shared, or member states’ exclusive competences respectively.

The crux of the matter brought before the Court lies exactly in this precise delineation of EU external competences: If the content of the EUSFTA falls under EU exclusive powers in its entirety, its conclusion as ‘EU-only’ would be mandatory. If certain treaty provisions are regarded as exclusive national competences, the agreement ought to be concluded as a ‘mixed’ agreement, including all EU member states as independent contracting parties. If only EU exclusive as well as shared competences were touched upon by the FTA, the decision to propose the conclusion (on behalf of the Commission) and to conclude the agreement (on behalf of the Council) as either ‘EU only’ or ‘mixed’ is legally optional and referred to the political discretion of the EU institutions involved in the applicable procedures set out in Article 218 TFEU (the general rules on EU negotiation and conclusion of treaties) in conjunction with Article 207 TFEU (the provision on the EU’s Common Commercial Policy).

The importance of the Court’s judgment for the governance of EU commercial relations with third countries – in particular the controversial EU/US trade deal (‘TTIP’) and EU/UK trade relations after Brexit – can hardly be underestimated. Given the broad and deep material coverage of the EUSFTA, the judgment will serve as a precedent for the conclusion of the vast majority of future EU trade and investment agreements. As such, the Court judgment in Opinion 2/15 could possibly mark the beginning of the era of ‘EU-only’ trade and investment agreements and, conversely, the end of the EU member states lengthy parallel ratification procedures required by ‘mixity’. As mirrored by the inter-institutional political debate on the legal status of the EU Canada Comprehensive Economic Trade Agreement (CETA), the eventual outcome of Opinion 2/15 has important implications on both the efficiency, reliability and credibility of EU trade and investment policy formulation, on the one hand, and the de jure legitimacy of multi-level economic governance in the European Union, on the other.

II.                Commission vs. Council and the Member States: The Arguments

Throughout the course of the hearing, the arguments of the parties focused on four contentious policy areas covered by the EUSFTA, notably disciplines on transport, investment, intellectual property rights, as well as sustainable development (labor rights & environmental protection). In the following, we will first outline a number of general legal arguments advanced by the parties that recurred during the hearing in application to all or most issue areas and discernably built on established CJEU case law. Subsequently, we highlight a selection of specific legal constructions that the parties put forward in respect of EUSFTA transport and investment rules.

1.     General Arguments of the Parties

a.      The Commission

As a first and predominant line of defense, the Commission representatives articulated a number of general arguments that aim at fitting the content of the EUSFTA, in its entirety, within the scope of the EU’s exclusive Common Commercial Policy (CCP) competence – Article 207 TFEU – as well as within the ambit other exclusive EU competences that can be implied in accordance with Article 3 (2) TFEU.

As such, the Commission proposed the broadest possible conceptual interpretation of the ordinary terms of Article 207, seeking to attribute maximum meaning to the expansion of CCP powers by the Lisbon reform of 2009, which saw the addition of services, foreign direct investment, and trade related intellectual property rights to the scope of CCP exclusive external powers.

Secondly, the Commission relied on a broad application of the ‘centre of gravity’ theory, which the Court had developed in its case law. The theory’s ‘predominance-test’ requires the use of a single legal basis where one of the aims and components of a measure “is identifiable as the main [one], whereas the other is merely incidental” (COM representative in reference to Case C-377/12, concerning the legal base of the EU partnership agreement with the Philippines). In this way, the Commission defended EUSFTA rules as measures falling under Article 207 where they “specifically [relate] to international trade in that [they are] essentially intended to promote, facilitate or govern trade and [have] direct and immediate effects on trade” (COM representative in reference to Case C-414/11 - Daiichi Sankyo).

Third, the Commission representatives made frequent use of the provisions of Article 3 (2) to advocate for implied exclusivity of otherwise shared competences. In codification of settled ERTA case law, Article 3 (2) TFEU prescribes EU exclusivity in case “the scope of EU rules may be affected or altered by international [member state] commitments where such commitments are concerned with an area which is already covered to a large extent by such rules” (Opinion 1/13, on the Hague Convention on child abduction, in reference to Article 3 (2) TFEU, 3^rd situation). Otherwise, EU exclusive competence may be implied where the “attainment of the Community objective [is] inextricably linked to the conclusion of the international agreement” (Opinion 1/03 on the Lugano Convention on civil jurisdiction, codified in Article 3 (2) TFEU, 2^nd situation).

Building on these three main lines of argumentation, the Commission developed a number of specific arguments in support of EU exclusivity in regard of foreign direct investment (FDI) protection and intellectual property rights (first, second, and third argument), sustainable development disciplines (second argument), and areas otherwise covered by EU rules to a large extent, such as maritime transport (second and third argument).

Yet, the Commission found it necessary to draw a second line of defense: in the alternative to full EU exclusivity, it held that the EUSFTA concerned EU exclusive and shared competences only. As such, the conclusion of the EUSFTA as ‘EU-only’ or ‘mixed’ would remain optional – or facultative - in accordance with the procedural rules of Article 218 TFEU in conjunction with Article 207 TFEU.

b.     The Council and the Member States

Living up to observers’ expectations, the Council and the member states’ representatives attacked the Commission presumption of EU exclusivity on various general and issue specific grounds, with an ubiquitous reference to the principle of conferral, which is set out in Article 5 (2) TEU. The EUSFTA concerned, in addition to the EU exclusive competence under Article 207 TFEU, both shared as well as exclusive member states’ competences. In consequence, “mixity is a must” for both the Council and the member states.

In particular, the Council and the member states demanded a narrow text based interpretation of Article 207 TFEU. Secondly, both Council and member states advocated for a restrictive employment of the ‘center of gravity’ theory that, in its application, needed to rest upon “objective factors amenable to judicial review” (member states representatives in reference to Case C—411/06, Shipments of Waste). More than once, the representatives of various parties referred to Opinion 2/00, on the Cartagena Protocol, in which the Court decided that “[w]hatever their scale, the practical difficulties associated with the implementation of mixed agreements (..) cannot be accepted as relevant when selecting the legal basis for a [Union] measure”. Instead, the Council and the member states advocated on several occasions that the choice of the legal basis should take account of the Court’s reasoning in Case C-411/06, where it was held that “[e]xceptionally, if (…) it is established that the act simultaneously pursues a number of objectives or has several components that are indissociably linked, without one being secondary and indirect in relation to the other, such an act will have to be founded on the various corresponding legal bases”.

Third, the parties argued in favor of restrictive reading of implied exclusive competences under Article 3 (2), 3^rd situation, in that respective conclusions required a “comprehensive and detailed analysis of the relationship between the envisaged international agreement and the EU law in force” (Council and member states representatives in reference to Opinion 1/13).

Following these more restrictive of the possible realm of interpretative approaches, the Council and the member states concluded that member states remained exclusively competent for maritime transport, FDI protection, portfolio liberalization and protection and (alleged) non-commercial aspects of intellectual property rights protection. Moreover, the parties held that the EUSFTA’s disciplines on labor rights and environmental protection established various independent and non-incidental aims and objectives that required reference to multiple legal bases in the TFEU.

2.     Policy-specific Arguments of the Parties

Up to until this point, arguably, the Commission, on the one side, and the Council and the member states, on the other, walked on trodden paths of EU primary law interpretation and established case law, in application to an economic treaty of unprecedented scope and depth and a constantly evolving EU internal legislative status quo. In the following few paragraphs, we highlight a selection of rather unconventional and even curious policy-specific arguments in the areas of transport and investment that may yet move the needle on the evolution of EU external exclusive competences.

a.      Transport

In the area of transport, the Commission notably questioned the scope of the carve-out Article 207(5), which exempts “the negotiation and conclusion of international agreements in the field of transport” from the TFEU provisions of the CCP. In a remarkable construction, the Commission argued that the addition of foreign direct investment to the terms of Article 207(1) via the Lisbon Treaty reform of 2009 had moved mode 3 of transport services provision as defined by WTO law, i.e. establishment and FDI, back into the scope of the CCP. Mode 1, 2, and 4 (movement of the service itself, movement of service recipients and providers) remained outside of the CCP’s legal basis as regards transport. The EU, however, was now exclusively competent for the negotiation and conclusion of agreements liberalizing and protecting foreign direct investment in all sectors, including transport. The Council and member states cried foul in reference to Opinion 1/08, in which the CJEU ruled that transport was fully exempted from the CCP, and which remained “good law” even after the Lisbon reforms and protected the full integrity of the 207(5) transport carve-out from the CCP. The Commission, in view of the parties, was victim of its own faulty logic reasoning. Any exemptions from Article 207 (5) would deprive the provision of its effectiveness.

In the area of maritime transport services, the Commission advocated for implied ERTA exclusivity (Article 3 (2), 3^rd situation TFEU) based on Regulation 4055/86. The Regulation prescribes broad mode 1 liberalization between EU member state nationals established in EU member states and third countries but does evidently not afford any liberalization commitment to nationals of third countries. The Council and member states hence pointed at the missing pieces for a comprehensive EU internal legal framework for transport services that could otherwise confer implied Union exclusivity. The parties further argued that the wide-ranging EUSFTA disciplines and objectives in this field were not incidental or subordinate to the commercial treaty objectives. Maritime transport services, in the view of the parties, remained a shared competence in accordance with Article 4 (2) (g) TFEU. Moreover, member states remained exclusively competent in regard of the regulation of third country vessels operators.

Inspired by this exchange of arguments, Advocate General Sharpston addressed the Council with a question of systemic relevance: What is, at the end, the decisive criterion or the threshold for the conclusion of an EU agreement in a field that is internally only partly covered by common rules, such as maritime transport? How many “hoops”, Sharpston asked, does the Commission have to “jump through” to prove EU exclusivity to the Council? Mrs. Sharpston further questioned whether internal exclusivity was a necessary condition for external exclusivity of competences. The Council, in response, denied that internal exclusivity was a conditio sine qua non but insisted on “strict conditions” for the conferral of implied exclusivity that were set out in Article 3 (2) TFEU. Moreover, the Council advocated for an application of the gravity theory that advanced “clear dividing lines”.

b.     Portfolio Investment

In a genuinely novel line of reasoning, the Commission advanced a treaty interpretation that would justify the implied exclusivity of Union competence over portfolio investment (ie, the purchase of non-controlling shares in companies), which is not included in the ordinary meaning of the term ‘foreign direct investment’ in Article 207 (1) TFEU. In doing so, the Commission departed from the otherwise currently uncontested notion that existing secondary EU legislation is the only contingency that can trigger an ‘ERTA effect’. The ‘ERTA effect’ confers exclusive competence in areas where member states exercise of external competence would otherwise affect already existing or even prospective ‘common rules’ (Art. 3 (2) 3^rd situation TFEU). Such ‘common rules’, according to the Commission, however, could also take the shape of EU primary law. With reference to Article 63 (1) TFEU, the Commission representatives voiced the opinion that the treaty-prescribed freedom of capital movement between member states (as well as member states and third countries) sufficed to constitute ‘common rules’ within the meaning of Article 3 (2) TFEU. The possibility of member states concluding international agreements that affected the prohibition of restrictions on capital movements as codified in Article 63 (1) implied EU exclusive external powers in this area. The Union was therefore exclusively competent for the negotiation and conclusion of agreements covering rules on portfolio investment liberalization and the protection of such investments.

In the alternative, according to the Commission, portfolio investment liberalization falls under the Union’s shared competences.

The Council and the member states took pains to counter the Commission’s line of reasoning with a larger number of sometimes diverging arguments. First and foremost, the parties noted the fact that that Article 63 (1), by itself, only codifies a prohibition of restrictions, but falls short of conferring legislative powers upon the Union. Using Article 63 (1) TFEU as a legal basis for external action was merely a “legal fix” that constituted an instance of “legal imagination” on behalf of the Commission. To the Council, it appeared inconceivable that a provision, which did not suffice as a basis for internal legislation could imply an (exclusive) external competence. Only the exercise of an internal competence may  pre-empt external member state action. Belgium and Germany, secondly, took the stance that such a wide interpretation of Article 3 (2) 3^rd situation TFEU facilitated an undue circumvention of the deliberate choice of the treaty makers to exclude portfolio investment from the scope of Article 207 TFEU and Article 64 TFEU. The two parties insisted on exclusive member state competence for portfolio investment. The representatives of Finland and Slovenia, on the other hand, appeared to suggest that the member states may share external powers with the Union in this area.

Countering the Council’s attack, the Commission, in response to an oral question asked by the Court, held that there was a “simple but very good reason” for the fact that the treaties did not codify a legal basis for the internal liberalization of portfolio investment: Article 63 (1) TFEU itself prescribed a comprehensive prohibition of restrictions to that end.

In another unprecedented interpretation of the treaties, the Commission cited Article 216 (1) in conjunction with Article 63 (1) TFEU as the correct legal bases for external Union acts that covered portfolio investment liberalization. The Council and several member states, in contrast, insisted that Article 216 (1) TFEU only conferred general treaty-making powers upon the Union and was unsuitable to serve as a legal basis for the conclusion of international agreements by the EU.

Upon inquiry of Judge Rapporteur Ilešič, the Commission and Council representatives found themselves in a rare moment of agreement to the extent that Article 64 TFEU could not serve as a legal basis for the internal liberalization of portfolio investment. According to the Commission, the harmonization of EU internal rules on portfolio investment could, however,  “maybe” be based on Article 114 or 352 TFEU – a statement that inspired the Court’s President Lenaerts to remind the Commission of the fact that the choice of the correct legal basis for a Union act was not “à la carte”.

In light of the circumstance that the Commission partly relied on a legal basis for an external competence, which allegedly did not require its internal exercise ex ante, Advocate General Sharpston questioned the Commission on the precise difference between the third situation governed by Article 3 (2) TFEU (as referred to by the Commission) and the second situation provided for by the same rule. Mrs. Sharpston’s enquiry, however, remained unanswered.

Secondly, the Advocate General questioned the Commission’s perception of the risk that member state agreements could ‘alter the scope of common rules’, whereas the common rules that the Commission referred to were in fact EU treaty provisions. The only way to alter the scope of primary law, Sharpston stated, was a treaty reform via the applicable constitutional provisions. In response, the Commission, in reference to the terms of Article 3 (2) TFEU, clarified that its argument did not extend to the alteration of the scope of treaty rules, but to the probability that the primary legal norm of Article 63 (1) could be affected by independent international member state agreements.

c.      Termination of Member States’ Bilateral Investment Treaties

Another point of legal debate that prominently featured in the hearing concerned the supersession, suspension, and termination of existing member states’ bilateral investment treaties with Singapore once the investment protection provisions of the EUSFTA will be provisionally applied or enter into force when the treaty is concluded. Article 9.10 EUSFTA provides that member states bilateral investment treaties “shall cease to have effect and shall be replaced and superseded by this Agreement”. A footnote to this provision stipulates that “the agreements between Member States of the Union and Singapore […] shall be considered as terminated by this Agreement, within the meaning of subparagraph 1(a) of Article 59 of the Vienna Convention on the Law of Treaties.” Yet, article 59 (1) VCLT prescribes that “a treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject matter and: (a) It appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty”.

While the Commission argued that past EU practice entailed an array of precedents for the supersession of member state treaties by EU external agreements, Judge Rapporteur Ilešič and Advocate General Sharpston questioned the appropriateness of the chosen legal modality as well as the EU competence for the termination of member states’ bilateral investment treaties (BITs) with Singapore via Article 9.10 of the EUSFTA. Both the Judge Rapporteur and the Advocate General, advanced a, however, unanswered request for a clarification as to whether the Commission wanted to argue in favour of the termination of the BITs via the duty of sincere cooperation enshrined in Article 4 (3) of the TEU. Otherwise, how would the Commission argue that it can include a provision in an ‘EU-only’ agreement that effectuated not only the succession but also the termination of member state bilateral agreements with Singapore under international law, given that the EU is not a contracting party to these agreements?

III.             Concluding Remarks

Opinion 2/15 raises a vast amount of general as well as policy area specific legal issues that are – in aggregate and in some instances individually - of tremendous importance for the delineation of EU competences vis-à-vis the Union’s member states. The significance of the Court’s judgment very much transcends the question of whether the EUSFTA is characterized as an ‘EU-only’ or a ‘mixed’ agreement in its entirety. Rather, the Court’s much awaited clarifications will have both systemic horizontal as well as policy area specific vertical implications for the operation of the EU’s legal system and its external relations.  Moreover, the judgment will likely clarify and may redefine the role and reach of the member states’ presence in the Union’s external economic relations in adaptation to the primary law reforms of the Lisbon Treaty, constantly evolving EU internal secondary legislation, and the expanding scope and depth of 21^st century trade and investment agreements.

We conclude this note with a question posed by the British Advocate General Mrs. Sharpston, at the very end of the hearing, to all parties. The question, however, remained unanswered.

If the Court, in Opinion 2/15, held that the EU-Singapore FTA is a mixed agreement, what would be the consequence for the conclusion of the treaty? Given the extensive scope of EU exclusive powers under the CCP, could a single member state veto the entire agreement?

David Kleimann and Gesa Kübek

Passau, October 4^th, 2016

Barnard & Peers: chapter 24

Photo credit: www.cnaint.com

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* David Kleimann is a Researcher at the Law Department of the European University Institute (EUI) in Florence (david.kleimann@eui.eu). Gesa Kübek is a Research Assistant at the Law Faculty of the University of Passau (gesa.kuebek@uni-passau.de). This report is based on hand-written notes that the authors prepared during the hearing. All potential errors are attributable to the authors alone.