Private law norms used to govern the interactions between banks and clients, credit rating agencies and investors, or between financial firms. Nowadays, however, these relationships have also become subject to financial regulation at the EU and national levels. Financial regulation has increasingly determined how financial firms should behave in the contractual and extra-contractual domain, often using traditional private law as an instrument in the pursuit of public goals, such as financial stability, market efficiency, and consumer/investor protection.
In my article in the recently published issue of 2021 European Business Organization Law Review (EBOR) 22 (1) in memory of Professor Brigitte Haar, I explore the link between EU financial regulation and private law in the domains of retail market regulation, prudential regulation, and enforcement more generally. The article shows that the legal regimes that have emerged in the wake of the 2007-2008 global financial crisis are essentially hybrid in nature. These regimes are not ‘public law’ or ‘private law’ in the traditional ‘national’ understanding. They are neither solely a product of the regulatory mind nor that of private law making. The post-crisis legal matrix for the financial sector in the EU is developing in a piecemeal fashion, combining elements of public and private law without a clear vision of how various bits and pieces actually fit together in the context of policy-making, standard-setting, and enforcement design. The resulting patchwork of rules raises serious concerns not only as to its overall coherence and effectiveness, but also in terms of justice.
In particular, my analysis of EU financial regulation does not reveal a coherent approach to retail financial markets and to private enforcement more generally, demonstrating a considerable interpersonal (ie between the financial firm and its clients) justice deficit. For example, the MiFID II/MiFIR regime shows the EU legislator’s distrust to the retail investors’ ability to support optimal choices and the attempt to construct ‘safe spaces’ within which retail investors can operate. However, in the context of the Banking Union, the EU legislator tends to regard retail investor holders of complex bank securities as ‘responsible financial citizens’, capable of bearing losses following bank resolution, thus prioritizing financial stability.
Similarly, the insensitivity of EU financial regulation to its private law dimension is manifest in the lack of a coherent approach to the issue of private law rights and remedies at EU level. For instance, some EU measures, such as the Payment Services Directive II (PSD II), were, at least in part, drafted from the private law perspective and clearly conferred individual rights on financial consumers. In contrast, MiFID I and MiFID II, for example, were drafted from the perspective of public supervision, casting conduct of business rules of investment firms as supervisory standards subject to administrative enforcement. This has led Member States to implement these rules within financial supervision frameworks, leaving the issue of their private law effect in the investment firm-client relationship to national civil courts. The latter in turn have demonstrated varying degrees of willingness to grant such effect in their legal systems. In addition, even where an EU measure does provide for private law remedies, they may not be effective. For example, the civil liability regime introduced by the Credit Rating Agencies (CRA) Regulation remains a paper tiger in practice, given the enormous civil procedural hurdles associated with it that investors need to overcome to obtain compensation.
Further, while the effectiveness of EU financial regulation in the prudential and conduct of business domain depends on a broader legal framework that reaches well beyond its regulatory ambit, the links between EU prudential standards, EU conduct of business rules, and national private law are currently weak, both in standard-setting and enforcement. For example, in its approach to fit and proper assessment of prospective board members of financial institutions, the ECB does not explicitly consider their past performance with respect to customer treatment. Similarly, financial regulators typically do not consider whether a particular culture in a financial institution regarded as sound has produced a positive impact on the design of financial products or customer treatment. Many questions also arise with respect to the private law effect of organisational requirements in EU prudential regulation, such as the governance standards enshrined in CRD IV and CRR, given that these measures, like MiFID I and MiFID II, are also silent on this issue.
In order to reduce this gap between EU financial regulation and private law in the current EU policy discourse and legal scholarship, we need a more holistic approach to EU financial regulation and private law that would allow us to systematically rethink the role of private law in the regulatory and enforcement landscape for financial markets and its relationship with public regulation more generally. This approach would break down the boundaries between public and private law and would view these two areas of law as distinct but closely interrelated. My article attempts to develop the contours of such an approach, arguing that financial regulation and private law are not just two parallel universes, but rather two sides of the same coin, each playing a critical role in safeguarding public and private interests in financial markets.
The proposed holistic approach to public regulation and private law in the financial sector points to the need to construct an integrated theoretical framework to analyse the existing legal regimes and develop new ones in terms of policy goals and interpersonal justice, substantive standards, and enforcement tools. Such an enriched framework, which could inform rule-making and enforcement at different levels of the EU multilevel governance system, would allow for a systematic assessment of financial regulation through the ‘private law’ lens and that of private law through the European ‘regulatory’ lens.
Examining EU financial regulation through the ‘private law’ lens would unveil a complex interplay between the regulatory dimension, contractual settings and private law remedies that we need to fathom in order to better regulate financial markets. Detailed empirical and legal-comparative studies can explore such an interplay within and across specific financial markets. A greater sensitivity to the ‘private law’ side of the coin in the context of EU law making can lead to a stronger overall focus on the inter partes dimension of EU financial regulation; to closer links between conduct of business regulation, prudential regulation, and traditional private law; and to a more coherent enforcement strategy.
At the same time, close attention should be paid to the division of competence between the EU and Member States in order to avoid excessive harmonisation and to leave room for further experimentation in standard-setting and enforcement at the national level. Rediscovering the role of private law in the regulation of financial markets along these lines is also a prerequisite for the EU to be able to adequately respond to the emergence of new technologies and to reorient financial markets to facilitate sustainable development.
Conversely, examining national private law through the European ‘regulatory’ lens would allow us to unpack the potential of traditional private law to contribute to the objectives of EU financial regulation, while at the same time realising justice between private parties. In particular, a complementary relationship between EU financial regulation and national private law, including both substantive and procedural rules, would prompt civil courts to reduce the interpersonal justice deficit at the EU level in cases where they are not—at least not explicitly—required to do so by EU law. By giving more attention to the ‘regulatory’ side of the coin within the private law discourse, courts could ‘upgrade’ the ‘public law’-coloured EU measures, such as MiFID II, with the interpersonal dimension or strengthen the latter in those EU measures where it is currently weak, such as the CRA Regulation.
Olha O. Cherednychenko is a Professor of European Private Law and Comparative Law at the University of Groningen, and Director of the Groningen Centre for European Financial Services Law (GCEFSL).