Regulating Investor Protection under EU Law

The Unbridgeable Gaps with the U.S. and the Way Forward

Antonio Marcacci

• Publisher: Palgrave Macmillan
• Year: 2018
• ISBN:
  9783319902975
• Topic: Business
• Subtopic: Financial Services
• Index: Business

This book analyzes the legal system for the protection of retail investors under the European Union law of investment services. It identifies the regulatory leitmotiv driving the EU lawmaker and ascertains whether and to what extent such a system is self-sufficient, using a set of EU-made and EU-enforced rules that is essentially different and autonomous from the domestic legal orders. In this regard, the book takes a double perspective: comparative and intra-firm. Given the federal dimension of the US legal system and, thus, the "role-model" it plays vis-à-vis the EU, the book compares the two systems. To fully highlight the existing gaps and measure how self-sufficient the EU system is against its American counterpart, the Union/Federallevel as such is analyzed – i.e., detached from the national (in EU terms) and State (in US terms) level. Regulating Investor Protection under EU Law also showcases the unique intra-firm perspective from aEuropean investment firm and analyzes how EU-produced public-law rules become a set of compliance requirements for investment services providers. This " within-the-firm " angle gauges the self-sufficiency of the EU system of retail investor protection from the standpoint of an EU-regulated entity. The book is intended for both compliance professionals and academic scholars interested in this topic while also including illustrative sections intended to provide a broader regulatory view for less-experienced readers.

© The Author(s) 2018

Antonio MarcacciRegulating Investor Protection under EU Lawhttps://doi.org/10.1007/978-3-319-90297-5_1

Begin Abstract

1. Introduction

Antonio Marcacci¹ 

(1)

European University Institute Alumnus - Compliance Professional at a Global Systemically Important Bank, Milan, Italy

 

End Abstract

The book revolves around the legal protection of retail investors under the European Union law. Although it originally stems from the “on-the-books” studies of the author, it has been enhanced by his subsequent “in-action” professional experience as Compliance Professional in the European banking and financial industry. For this reason, the book is intended for both Compliance Professionals and academic scholars interested in this topic, and the language and jargon employed are meant to adapt to both audiences.

The main argument of the book is that the EU lawmaker has been building a European Regulatory Investor Protection Law which, on the one hand, apparently reproduces the American approach on investor protection, and, on the other hand, is increasingly self-sufficient. The Americanization feature is particularly enshrined in the “rational investor/disclosure” paradigm, whereas the self-sufficiency implies a set of EU-made and EU-enforced rules that is essentially different and autonomous from the Member States’ legal orders. The driver of the EU lawmaker is the policy goal to morph the traditionally bank-based financial markets of Continental Europe into a single market-based financial system like that of the United States. In order to do so, the EU lawmaker uses public-law rules to adapt relationships traditionally regulated by private law to the new financial markets infrastructure without, anyhow, paying enough attention to the private enforcement of such rules. The analysis leverages on the European Regulatory Private Law (ERPL) theory¹ which makes it possible to highlight the regulatory nature of the EU law and the current trend toward self-sufficiency through centralization of regulatory and enforcement powers at EU level.

The methodology employed is a balance between the author’s “on-the-books” studies and his “in-action” experience as Compliance Professional. The book is divided into two main parts: the law-on-the-books, that is, investor protection in the texts; and the law-in-action, that is, the enforcement² of investor protection rules on the part of public and private actors, and the embedding of such rules into investment firms,³ for which the internal Compliance Function is in charge.

The methodological choice lets the monograph take a double perspective: comparative and intra-firm. Given the federal dimension of the US legal system and the “role-model” it plays vis-à-vis the EU, the book compares the two systems. In order to fully highlight the existing differences and measure the completeness of the EU system against its American counterpart, the Union/Federal level as such— that is, autonomous from the domestic (in EU terms) and State (in US terms) level—is taken into account. The intra-firm perspective unfolds through the eyes of a European investment firm and analyzes how EU-produced public-law rules become a set of compliance requirements for investment services providers. This in-action standpoint is essential to gauge the completeness of the EU system of retail investor protection for an EU-regulated firm. The word “compliance” is, then, used in the organizational context of an investment firm and is related to the tasks carried out by a firm’s internal Compliance Function.

The book opens by drawing up the boundaries of its normative scope. Chapter 2 starts by briefly explaining the key differences of the two traditional patterns of financial systems and the gradual shift—from bank-based toward market-based—which has been occurring in Europe over the last decades. It, then, gives an account of the ERPL theory and embeds the EU law of investor protection into the margins of such theory. The claim is that the EU law of investor protection is actually a “European Regulatory Investor Protection Law”. The following chapters are meant to provide footing for this assertion.

The first Part of the book concerns the above-defined “law-on-the-books”. Chapter 3 provides the reader with an illustrative breakdown and an evolutionary analysis of the European statutes dealing with financial services. The aim is twofold: on the one hand, it highlights the functional role that the retail investor plays in the EU law of financial services within the context of the construction of an EU-wide market-based financial system and the related introduction of specific—increasingly detailing—public-law rules.

An integrated and liberalized financial services market requires proactive and rational retail investors, directly involved in market operations and capable of making good investment decisions. To this end, the disclosure paradigm was at the outset used as the cornerstone of retail investor protection. Under it, retail investors were considered rational market participants, and their protection would ultimately work as an ancillary tool to the general goal of market efficiency. However, over time, the regulatory approach has become increasingly sensitive toward less-rational retail investors and has required firms to proceduralize consumer protection tools previously handled mostly through contracts. The post-crisis legislative wave has intensified such an approach.

On the other hand, the chapter flags—by giving concrete examples—how the EU law-on-the-books has become a detailed set of regulatory requirements for investment firms. This is the intra-firm proceduralization of conduct-of-business duties set forth by EU law. Through proceduralization, the Compliance Function has become a central figure within the firms, pursuing the purpose of overcoming/mitigating inefficiencies at micro level with a broader view of contributing to market efficiency at macro level.

Subsequently, Chap. 4 compares the single features of the client-service provider relationship under the EU and US laws in order to test to what extent the two systems share similar patterns and verify whether and to what extent the US blueprint may be reproducible in Europe. The result of the comparison highlights the structural difference between the two systems: whereas the United States rests on a common-law contract law, the European Union arrangement for investor protection relies on public-law duties.

The second part of the book concerns the above-defined “law-in-action”. Chapter 5 covers public regulators and their regulatory and enforcement powers, while Chap. 6 describes private enforcement mechanisms. The analysis is not carried out from a procedural law perspective but, rather, with a view to discovering to what extent public and private mechanisms interact with each other (in both the EU and the United States), and whether Europe prefers one set of tools over the other.

The findings of the two chapters reveal that the enforcement of EU law of investor protection is very much—if only entirely!—public driven/regulatory. This is so because the EU law is substantially public even when it touches upon (and penetrates) private-law norms. Due to its public nature, EU investor protection norms are used by public authorities to monitor and gauge service providers’ compliance with the law and become regulatory requirements for investment firms (embedded and monitored by the Compliance Function).

Against this backdrop, the EU agency devoted to securities markets—the European Securities and Markets Authority (ESMA)—has been slowly acquiring enforcement powers. Although such powers still massively rest on the shoulders of domestic authorities, local supervisors are more and more under the influence of ESMA’s activity for the convergence of interpretative and enforcement practices at EU level. Civil procedural rules, instead, are firmly in the hands of the Member States and the only tool the EU has in this area is the establishment of fast and reliable Alternative Dispute Resolution mechanisms, harmonized at European level.

When being read together, Chaps. 5 and 6 offer a comparative account of the EU vis-à-vis the US system. Not only does the EU still lack a truly, single (“federal”, in the American language) law enforcer (but recent reforms may change this status in the mid-run), but the absence of any sort of private enforcement at European level renders it impossible to contemplate an EU version of the US federal interplay between private and public enforcement mechanisms. The result is that the European system still looks incomplete.

Finally, Chap. 7 concerns the Compliance Function and its activity as rule-embedder and enforcement frontliner, with the aim to give the reader an account of how the “law-in-action within an EU firm” unfolds. Since its establishment under Market in Financial Instrument Directive (MiFID) I, the Compliance Function has been gaining importance vis-à-vis the traditional Legal Department, and this phenomenon consolidates the finding that the EU system is public-law lopsided.

Importantly, when the European system of investor protection is being viewed through the lenses of a European investment firm, then its degree of self-sufficiency looks far less incomplete than the vision gained from the formal comparison with the United States. The regulatory production has substantially—if not entirely—shifted toward the European level, with ESMA (and, formally, the European Commission) adopting most of the norms directly affecting and directly applicable to investment firms. The result is that EU-produced norms by now automatically become regulatory requirements that have to be complied with by regulated entities under the rule-embedding and monitoring of the internal Compliance Function. In addition, public enforcement has been enhanced with emergency investor protection powers not only for domestic supervisors but even for ESMA (under certain circumstances). Private enforcement procedures are still under the full responsibility of the Member States, but extra-judicial mechanisms and intra-firm complaints-handling procedures (which cross private and public enforcement) are being harmonized by EU law (and more so in the future through ESMA supervisory convergence activity).

The result of the combination of the two parts of the books is twofold. On the one hand, the book shows that the rational investor paradigm has been progressively dimmed in favor of a more paternalistic approach that shifts investment decision responsibility onto the shoulders of service providers (and their internal Compliance Function). Nevertheless, the US system still works as a blueprint, and the comparison shows how the US interplay between private and public enforcement mechanisms simply does not exist in Europe and it is not even reproducible. When being compared with the United States, the EU system of investor protection seems irreparably incomplete.

On the other hand, however, the European law of investment services now provides for a full set of public-law conduct-of-business rules. Not only does such a set affect traditional private-law relationships and is being used as supervisory and enforcement tools (European supervision private law), but its level of details makes it directly applicable to firms.

The outcome is that the EU normative production automatically becomes regulatory requirements for investment firms, with the Compliance Function playing the increasingly important role of rule-embedder and internal enforcer, in charge of overseeing intra-firm complaints-handling procedures (for very minor infringements). On top of this, the new emergency enforcement powers granted to ESMA and the harmonization of extra-judicial mechanisms (significantly, the Compliance Function copes with both) give the EU system a new layer of completeness. The result is that from the lenses of a European investment firm, the EU system of investor protection increasingly resembles a self-sufficient system.

Bibliography

1. Centre for Economic Policy Research. “The Fundamental Principles of Financial Regulation – Geneva Reports on the World Economy 11.” International Center for Monetary and Banking Studies, 2009.
2. Grundmann, Stefan, and Falko Glasow. European Company Law: Organization, Finance and Capital Markets. 2nd ed. Cambridge: Intersentia, 2012.
3. Micklitz, Hans-Wolfgang. “The Visible Hand of European Regulatory Private Law – The Transformation of European Private Law from Autonomy to Functionalism in Competition and Regulation.” Yearbook of European Law 28, no. 1 (2009): 3–59.
4. Tuch, Andrew. “Conduct of Business Regulation.” In The Oxford Handbook of Financial Regulation, edited by Niamh Moloney, Eilís Ferran and Jennifer Payne. Oxford: Oxford University Press, 2015.

Footnotes

1

The European Regulatory Private Law theory has been developed over the years by Professor Hans-Wolfgang Micklitz. Among the theory’s founding texts, the following is to be mentioned: Hans-Wolfgang Micklitz, “The Visible Hand of European Regulatory Private Law—the Transformation of European Private Law from Autonomy to Functionalism in Competition and Regulation,” Yearbook of European Law 28, no. 1 (2009).

 

2

Within the context of this book, “private enforcement mechanisms” englobe the enforcement actions brought by private parties—either individually or collectively—before civil courts and Alternative Dispute Resolution schemes such as arbitration. On the other side of the spectrum, “public enforcement mechanisms” englobe the enforcement actions brought by public supervisory authorities.

 

3

The “embedding of rules into investment firms” means the transformation of extra-firm rules (legal norms produced by public rulemakers) into intra-firm rules (internal compliance requirements).

 

© The Author(s) 2018

Antonio MarcacciRegulating Investor Protection under EU Lawhttps://doi.org/10.1007/978-3-319-90297-5_2

Begin Abstract

2. Toward a European Regulatory Investor Protection Law

Ant...