Documents considered by the Committee on 4 November 2009 - European Scrutiny Committee Contents

Annex: European Financial Supervision — delegating power to Community agencies and legal bases for doing so

General context

1. The Treaty on the European Community (EC Treaty) does not provide for the creation of Community agencies. This is significant because, under the 'principle of conferral', the Community is only empowered to act where power to do so has been conferred on it by its Member States under the EC Treaty. The principle of conferral underpins Community law.

2. So the question of delegating power to a subordinate agency is necessarily delicate because the Member States have not conferred power on the Community to do so. It is also delicate because of the inherent risk that the Community will give more power to a subordinate agency than it has itself, thereby extending the Community's field of activity further than conferred on it by the Member States.

3. That said, it is understandable that over the years the European Commission, responsible for overseeing the implementation of ever-expanding Community policy, has considered it necessary to delegate certain tasks to subordinate agencies. This has usually been because it is lacking either resources or expertise, or both, to ensure that a complex area of policy is correctly implemented.

4. To date agencies have been created to help implement very specific technical, scientific or managerial aspects of policy, where specialist skills are required. Examples include the Community Plant Variety Office, the European Aviation Safety Agency, European Centre for Disease Prevention and Control, the European Chemicals Agency, the European Environment Agency, the European Food Safety Authority, the European Maritime Safety Agency and the European Medicines Agency.

Specific rules on the lawful delegation of power

5. In the absence of Treaty provisions, the European Court of Justice (ECJ) has been called upon to define the circumstances in which the Community can lawfully delegate power to a subordinate agency. The Meroni doctrine, arising from a 1958 case[10] brought against the High Authority of the Coal and Steel Community (replaced in 1967 by the European Commission), established the following rules:

  • the delegating authority can only delegate to an agency powers that it possesses itself under the EC Treaty;
  • the exercise of power by the agency must be subject to the same rules as would apply if the delegating authority were exercising the power (e.g. duty to state reasons, right to be heard, right to appeal);
  • the delegating authority has to take an express decision transferring the powers;
  • any procedure for assessment by an agency on its own authority must be subject to precise objective criteria so as to exclude arbitrary decision-making and to make judicial review possible;
  • delegation of power can only relate to clearly defined executive powers, the use of which must be entirely subject to the supervision of the High Authority;
  • consequently, it was not permissible to delegate broad discretionary powers that gave the agency a wide margin of appreciation.

6. The ECJ has considered the question of delegation in a number of subsequent judgements but has been reluctant to refer specifically to the Meroni judgement. One of the issues at stake in 1970 in Köster[11] was the role of a "management committee" established by the Council to assist the Commission when implementing the common organisation of the market in cereals. As explained by the Council and later confirmed by the Commission, "… the detailed rules of the management committee procedure do not have the effect of putting the powers conferred on the Commission in issue: they introduce, it is true, the deliberations of a committee but in the exercise of the powers conferred on it the Commission remains the master of its own decision: it is never obliged to follow the opinion of the Committee…" Concluding therefore that the function of the committee was only such as to ensure permanent consultation in order to guide the Commission, the Court found no reason to interfere.

7. Romano,[12] decided in 1980, concerned the power of the Administrative Commission for the Social Security of Migrant Workers, an auxiliary body of the Commission, to lay down certain criteria which national authorities would have to take into account. The duties of the Administrative Commission included comprehensive law-making competences, inter alia dealing with all questions of interpretation arising from a Community Regulation. Here, the Court held that " … it follows both from Article 155 of the Treaty and the judicial system created by the Treaty, and in particular by Articles 173 and 177 thereof, that a body such as the Administrative Commission may not be empowered by the Council to adopt acts having force of law …"

8. In 2005, the ECJ gave a clear signal that the distinctions outlined in the Meroni doctrine still apply. Referring directly to Meroni, the Court upheld the conferral of power to one of the organs of the European Central Bank.[13]

    "With regard to the conditions to be complied with in the context of such delegations of powers, it should be recalled that, as the Court held in Meroni, first, a delegating authority cannot confer upon the authority to which the powers are delegated powers different from those which it has itself received. Secondly, the exercise of the powers entrusted to the body to which the powers are delegated must be subject to the same conditions as those to which it would be subject if the delegating authority exercised them directly, particularly as regards the requirements to state reasons and to publish. Finally, even when entitled to delegate its powers, the delegating authority must take an express decision transferring them and the delegation can relate only to clearly defined executive power."

9. A delegating act which fails to respect the principles outlined above would be liable to an action before the ECJ for annulment of the entirety of the act on grounds of illegality (ultra vires).

Have the specific rules on the lawful delegation of power being respected in the draft Regulations[14] establishing the European Supervision Authorities (ESAs)?

(Given the time constraints the observations below are necessarily preliminary.)

Delegation of power to ESAs in Article 11 and 9 of the draft Regulations

10. At the very least there must be a concern whether Article 11 of the draft ESA Regulations — Settlement of disagreements between competent authorities — respects the rules on delegation of power. Paragraph 3 permits the ESAs to require national competent authorities to "take specific action to refrain from action in order to settle the matter in compliance with Community law". Paragraph 4 empowers the ESA "to adopt an individual decision addressed to a financial institution requiring the necessary action to comply with its obligations under Community law, including the cessation of any practice." There is little or no oversight by the Commission. In view of the rules which apply to delegation, these extensive powers risk:

  • going further than the powers the Commission would have if it acting in place of the ESA (which EC Treaty provisions would apply?);
  • delegating broad discretionary powers that give the ESAs too wide a margin of appreciation in the interpretation and application of Community law (akin to an "act having the force of law" as stated in Romano). This could interfere with the EU's Treaty-based institutional balance;
  • applying a procedure for assessment which is not subject to precise objective criteria so as to permit arbitrary decision-making and to make judicial review impossible (on the face of the Regulations the reference to "in compliance with/obligations under Community law" is insufficiently precise).

11. Unless these concerns are fully considered, there is a risk that the Regulations establishing the ESAs could be annulled on the grounds of illegality once finally adopted. For example, an individual financial institution or national competent authority to which a decision is addressed under Article 11 could apply to have the relevant ESA Regulation annulled on one or several of the grounds above.

12. Parallel concerns arise with respect to some of the enforcement measures in Article 9, Consistent application of Community rules, and in Article 10, Action in emergency situations. In Article 9(6) the ESAs are given the power "to adopt an individual decision addressed to a financial institution requiring the necessary action to comply with its obligations under Community law, including the cessation of any practice." The same power exists in Article 10(3).

Legal base

13. The question of legal base is relevant to the scope of power that can be delegated under the EC Treaty. The fifth recital of the preamble of the draft ESA Regulations encapsulates the policy justification for using Article 95 EC — approximation of laws in the internal market — as the legal base, with the legal justification (citing an ECJ case which the UK lost) encapsulated in the tenth recital. The nineteenth recital of the preamble of draft Regulation setting up the European Systemic Risk Board (ESRB) similarly explains why this measure will "contribute directly to achieving the objectives of the internal market".

14. It will be very important for Member States to satisfy themselves that "it is actually and objectively apparent from the legal act that its purpose is to improve the conditions for the establishment and functioning of the internal market[15]"? (In this regard it is noteworthy that the Minister (Lord Myners) in his Explanatory Memorandum of 15 October states that "although the legal base of the regulations is Article 95, their principal objectives relate to the right of establishment and free movement of services.") If an internal market aim is not sufficiently apparent, the Regulations will be liable to an action before the ECJ for annulment of the entirety of the act on grounds of illegality (ultra vires).

15. Article 308 EC could possibly be relied upon as a replacement legal base if the purpose of the ESAs and the ESRB is considered to be consistent with "attain[ing] … one of the objectives of the Community" but where no precise legal base exists in the EC Treaty. In contrast to Article 95 EC, where decisions are taken by QMV, decisions under Article 308 EC are taken on the basis of unanimity, with each Member State therefore having a veto. Nine Community agencies have been set up on the basis of Article 308 EC, or its predecessor Article 235 EC, including the European Agency for Safety and Health at Work, the European Centre for the Development of Vocational Training, the European Training Foundation and, most recently, the European Agency for Fundamental Rights.

16. In assessing the appropriateness of the legal base, the following types of question arise. Are the ESAs being established to "preserve and improve the conditions for the establishment of a fully integrated and functioning internal market in the field of financial services", as averred in the fifth recital? Or is it more a case of overseeing "the orderly functioning and integrity of the financial system" (Article 9(6))? If it is primarily the latter, is Article 95 the appropriate legal base?[16] In short, the Government should satisfy itself that the propositions made in the fifth and nineteenth recitals of the respective draft Regulations are both economically coherent — i.e. linking the management of risk with the regulation of the internal market — and reflected in the contents of the Articles of the Regulations. On the face of the drafts, there is a counter argument to say that these Regulations primarily address the management of general risk and stability in financial services. The connection between that and the "improvement of the conditions of the conditions for the establishment and functioning of the internal market"[17] is far from clear cut.

17. By contrast, the correctness of the legal base of the Council Decision on the role of the ECB in the functioning of the ESRB is clearer. Article 105(6) gives the Council power to confer on the ECB "specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings". Any concerns about the substance of the ECB's role beyond providing a secretariat should be reflected in amendments to the Articles, not the legal base.


18. Finally, there may also be the separate but related ground for challenging the draft Regulations, namely whether the powers given to the ESAs and ESRB are proportionate to the legislative aim. In other words, are the powers set out in Articles 9, 10 and 11 really necessary to meet the claimed objective of the functioning of the internal market under Article 95 EC. The Government should have assessed the proportionality of the draft Regulations, but the Minister's Explanatory Memorandum of 15 October is silent on it, and the Minister's letter of 26 October does not address this point in adequate detail. (The principle of proportionality is set out in the final paragraph of Article 5 of the EC Treaty.)

10   Case C -9/56 and 10/56, Meroni v High Authority [1957/1958] ECR 133. Back

11   ECJ, C-25/70, 1970, 2 ECR 1161, Einfuhr- und Vorratsstelle für Getreide und Futtermittel v. Köster, Berodt & Co. See also ECJ Opinion 1/76, 2007. Back

12   Case C-98/80, Romano v Institut National d'Assurance Maladie Invalidité [1981] ECR 1241, para 20.  Back

13   Case C-301/02 P, Tralli v. ECB [2005] ECR I-4071, para. 43Back

14   Based on drafts dated 23.9.2009. Back

15   Case C-217/04, UK v European Parliament and Council of the European Union, [2004]. But see AG Kokott's opinion on the extent of Article 95 EC, which was not followed by the Court. Back

16   The ECJ has interpreted the residual power to act under Article 95 EC fairly widely, but that is not to say these Regulations stretch that interpretation too far. Back

17   See 5 above Back

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