Documents considered by the Committee on 9 May 2018 Contents

5The Law Applicable to Assignment of Claims in the Capital Markets

Committee’s assessment

Legally and politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Treasury Committee

Document details

(a) Proposal for a Regulation on the law applicable to the third-party effects of assignment of claims; (b) Communication from the Commission on the applicable law to the proprietary effects of transactions in securities

Legal base

(a) Article 81(2); TFEU (b)—



Document Numbers

(a) (39603), 7222/18 + ADDs 1–3, COM(18) 96; (b) (39577), 7358/18 + ADDs 1–2, COM(18) 89

Summary and Committee’s conclusions

5.1The Commission’s 2015 Capital Markets Union Action Plan, endorsed by the Council is intended to foster cross-border investment in the EU and thereby facilitate access to finance by firms and consumers. When the Action Plan was reviewed in 2017 the Commission announced future action on rules on the ownership of securities and the third-party effects of assignments of claims.

5.2Examples of common financial transactions involving assignment are:

5.3The EU already has comprehensive rules of private international law governing which law is applicable to cross-border contracts, the Rome I Regulation.29 The UK opted in to this Regulation. Whilst it covers the contractual obligations of assignment (for example, the obligations between the assignor and the assignee and between the assignor and the original debtor) it does not cover proprietary rights (for example, which Member State’s formal requirements apply for an assignment to be legally effective, what happens if the same debt has been assigned more than once, or which claim takes priority in the case of insolvency).

5.4The general principle which the Commission is seeking to apply, albeit with exceptions, is that the law of the Member State where the assignor has its habitual residence should apply. Its guidance and proposal are set out in more detail below.

5.5Document (a), the draft Regulation, would apply to assignments of financial instruments which are not already governed by specific EU rules.

5.6Document (b) seeks to provide a consistent interpretation to specific existing EU rules applicable to cross-border transactions in securities found in:

5.7These Directives make differently worded provisions as to the applicable law. In its Communication, the Commission seeks a common interpretation to make the applicable law that of the place of any register or account, and gives guidance for determining that place.

5.8In his Explanatory Memorandum on the Communication, the Minister (John Glen) confines his analysis to indicating that the Government has triggered Brexit, that the UK supports the Capital Markets Union project and suggesting that the Government would want to consider whether the UK would want to align itself to legislative and other changes in securities law.

5.9The Explanatory Memorandum in respect of the proposed Regulation provides a fuller analysis and indicates that:

5.10The Commission has indicated that the greatest response to its consultations has come from the UK. Furthermore, it is suggesting that the Regulation should not apply until 18 months after it has come into force. Therefore, the Regulation is not likely to apply to the UK.

5.11We retain these documents under scrutiny pending the Government’s further consideration (including on the specific concerns it has raised, on subsidiarity, and on whether or not to exercise the UK opt-in) and consultation with interested parties.

5.12We ask to be notified of the Government’s decision on the opt-in, and the reasons for it, before it is exercised.

5.13Because of their significance to the Capital Markets we draw these documents to the attention of the Treasury Committee.

Full details of the documents

(a) Proposal for a Regulation on the law applicable to the third-party effects of assignment of claims: (39603), 7222/18 + ADDs 1–3, COM(18) 96; (b) Communication from the Commission on the applicable law to the proprietary effects of transactions in securities: (39577), 7358/18 + ADDs 1–2, COM(18) 89.

The Commission Communication

5.14This Communication sets out the different wording in the three Directives with regard to determining the applicable law in respect of the proprietary effects of transactions in securities. These refer either to a securities register or account being located or maintained in a particular Member State. The Commission sets out the arguments why, in this context, “located” and “maintained” have the same meaning and indicates that the current criteria used by some Member States to determine that place all appear to be valid i.e.

The Proposed Regulation

5.15The proposal applies to third-party effects of assignments of claims in civil and commercial matters which give rise to a conflict of law between Member States, subject to exceptions—including for claims arising from family relationships, trusts and insurance contracts. The third party effects cover, in particular, matters such as the requirement to register or publication formalities, the priority of rights of the assignees where there is more than one, the priority of the rights of the assignee over the assignor’s creditors, the priority of the rights of the assignee over the rights of a beneficiary of a transfer of contract in respect of the same claim and the priority of the rights of the assignee over the rights of the beneficiary of a novation contract33 against the debtor in respect of an equivalent claim.

5.16The proposal sets out the general rule that the applicable law should be that of the habitual residence of the assignor, even if that is the law of a third country. There are exceptions, notably to allow a choice of law to be made by the assignor and the assignee in respect of assignments with a view to securitisation.

5.17The determination of the applicable law under the proposal is made subject to mandatory requirements and a public policy exception.34

Our subsidiarity analysis

5.18We do not consider it appropriate to recommend to the House that it issue a reasoned opinion that the proposed Regulation does not comply with the principle of subsidiarity. This principle requires, in areas of shared competence such as this, that the Union should only act if and so far as the objectives of the proposal cannot be sufficiently achieved by the Member States, but can, by reason of the scale and effect be better achieved at Union level.

5.19By its proposed Regulation the Commission is seeking to harmonise the conflict of laws principles that should be applied to determine which law is applicable in a dispute arising on a cross-border assignment. It is not seeking to harmonise the law relating to assignments itself. The inherent cross-border nature of the objective of addressing conflict of law rules, and not the substantive law of Member States, makes it less likely that the principle of subsidiarity has been breached.

5.20Whilst the Government indicates that further consideration of the application of the principle of subsidiarity is required, it recognises that there are different applicable law rules in this area and supports identifying ways to deliver greater certainty. This implicitly supports prospect of the objective of the proposal being tackled at EU level.

5.21One objection raised by the Government is that it has yet to be persuaded that the proposed Regulation as currently drafted is the most effective way of achieving the stated objectives of the proposal. Again, that points towards it being appropriate to tackle the objective at EU level, albeit by taking a different policy approach.

5.22The Government also point out that the Regulatory Scrutiny Board, which examines the Commission’s justification for proposing legalisation, originally gave a negative assessment of the Commission’s Impact Assessment. This can be a pointer to subsidiarity concerns. However, that Board then gave a positive opinion on a revised version on the understanding that there would be a strengthened justification of the option chosen on securities in relation to the evaluation, and to address the consistency between the two solutions found for claims and securities. This again points to there having been concerns as to the policy choice for achieving the objective rather than concerns that the EU might not be better placed to act than the Member States

5.23At a practical level this proposal is unlikely to be adopted before the end of the transitional/implementing phase of the UK’s withdrawal from the EU.

Previous Committee Reports


29 Regulation 593/2008.

30 98/26.

31 2001/24.

32 2002/47.

33 Novation occurs for example when a contractual obligation is replaced with another, or added to or replaced.

34 Mandatory requirements are rules which must be applied to protect interests which are regarded in the place of determination of the dispute as crucial for that countries’ economic, social or political purposes; a public policy exception should only be applied if the result of apply the rule laid down in the proposed Regulation would be unacceptable in the framework of national law.

Published: 15 May 2018