5_Market regulation and the public/private divide

Private law vs. Public law

Public law:

• Private parties - public authorities

• Public interests

• Distributive (social) justice: socially just distribution of goods in a society (e.g. taxes)

• Public enforcement:

  • By public authorities though public law means

  • Ex ante compliance and deterrence

Private law:

• Private parties

• Private interests

• Interpersonal (corrective) justice: balance between the parties’ interests through their respective rights and remedies (e.g. damages)

• Private enforcement:

  • By aggrieved private parties through private law means

  • Ex post compensation

What distinguishes public law from private law today?

Public law focuses on the vertical relationship between public authorities and private parties and equips public authorities with the necessary powers and enforcement instruments to act in the public interest

• E.g. constitutional law, administrative law

What distinguishes private law from public law today?

Private law constructs a horizontal legal framework which allows private parties to shape their legal relationship as self-determining agents, and which primarily seek to ensure the balance between the interests of the parties through their respective rights and remedies

• E.g. contract law, tort law

The use of public and private law in the context of market regulation examples

Diselgate scandal:

Example: How to effectively regulate unfair commercial practices in the EU?

• Determining the goal or outcome to be achieved:

  • Cleansing the marketplace of unfair commercial practices to ensure the proper functioning of the internal market and consumer protection

  • If such scandals persist, consumers will lose trust in the market, which will make it impossible for the market to function

• Setting the standard of conduct required from market participants:

  • Prohibition of unfair commercial practices (incl. misleading and aggressive) (See: Unfair Commercial Practices Directive)

• Choosing enforcement techniques:

  • Public enforcement through administrative law means (e.g. fines)

  • Private enforcement through private law means (e.g. compensation for damage, a price reduction or termination of the contract – private law tools to ensure compliance with the regulatory standard)?

  • Individual or collective?

> how these three steps are intertwined in the context of using public and private law instruments for regulatory purposes

Functionalist approach of EU law

The EU legislator’s task in the context of market integration is viewed as problem-solving

• May hinder the establishment of the EU internal market

The distinction between public and private law is not recognised as such

• EU law does not acknowledge this distinction

Public law and private law concepts are used as regulatory tools in novel combinations (Public and private law are being mixed together in new ways to regulate things)

• In order to pursue certain regulatory objective

The EU’s experimentation with regulatory tools in regulating the markets has led to the emergence of legal hybrids

Legal hybrids combine elements of public and private law: e.g.

• ‘European regulatory private law’ (H.-W. Micklitz) or ‘hybrid regulation of markets (H. Collins)

• ‘European supervision private law’ (O.O. Cherednychenko)

Multi-level system of governance

EU law implies multi-level system of governance

• Interplay between EU law and international law

• EU law enjoys supremacy over national law

• But in order to be able to achieve regulatory objectives, EU law needs national law, national courts and national regulatory agencies

• Dialogue between international and national law is really important

  • E.g. national laws asking the Court of Justice of the EU for preliminary ruling

• There is this dependence on national law – not of a hierarchical system potentially

European Regulatory Private Law Examples

The producer shall be liable for damage caused by a defect in his product – Product Liability Directive 1985

• Sleeping pill for pregnant women turned out to be dangerous for pregnant women

• EU tried to intervene to ensure liability of producers and to prevent such disasters from happening

Diselgate scandal

• Unfair Commercial Practice Directive, art. 5)

• 1. Unfair commercial practices shall be prohibited

• 2. A commercial practice shall be unfair if: (a) it is contrary to the requirements of professional diligence, and (b) it materially distorts or is likely to materially distort the economic behaviour with regard to the product of the average consumer whom it reaches or to whom it is addressed, or of the average nenber of the group when a commercial practice is directed to a particular group of consumers (…)

Payment Services Directive 2, art. 73(1)

• Member States shall ensure that, without prejudice to Article 71, in the case of an unauthorised payment transaction, the payer’s payment service provider refunds the payer the amount of the unauthorised payment transaction immediately, and in any event no later than by the end of the following business day, after noting or being notified of the transaction, except where the payer’s payment service provider has reasonable grounds for suspecting fraud and communicates those grounds to the relevant national authority in writing. (…)

• In cases of an unauthorised payment transaction, the payer’s payment service provider refunds the payer the amount of the unauthorised payment transaction immediately

• Shifts liability if money has disappeared from your account and you do not know where it has gone

  • Protect consumers and ensure the well-functioning payment market in the EU

European regulatory private law definition

A body of EU secondary law which affects the relationship between private parties, regardless of the nature of the law – public or private – in which it has been transposed into the national legal order of a particular Member State

• Also transposed into administrative law

Private law is used as an instrument of European market integration

• This instrumental role of law

European market integration: Towards the establishment of the internal market for goods and services in the EU

• But divergent national laws

  • Firms might not know what to apply

• And information asymmetry/imbalance of bargaining power between market participants

Harmonisation of national laws to ensure (to some extent):

• A level playing field for businesses

• Adequate protection for consumers

• Other public goals

Why European regulatory private law?

Many new challenges ahead:

• Digitalisation

• Sustainability

Purely national solutions do not suffice

Neither do purely ‘public law’ instruments and enforcement mechanisms

The legal matrix (picture)

Alone would not solve all problems, needs implementation at national levels

• Many of the instruments discussed are implemented in national public law > Even though this is about private relationships: the rules are often enforced through public law mechanisms

• Administrative courts to appeal

• ADR (Alternative Dispute Resolution) bodies enforcing rules that govern relations between private parties > EU law shapes private relationships

• Unity of EU law, we have the Court of Justice

—> EU law sets the framework for regulating private relationships to integrate the market, but it depends on national public and private law systems to implement and enforce it, with the Court of Justice ensuring consistency.

European supervision private law example

Markets in Financial Instruments Directive II, art. 24(1)

• ‘Member States shall ensure that, when providing investment services or, where appropriate, ancillary services to clients, an investment firm act honestly, fairly and professionally in accordance with the best interests of its clients.’

• An investment firm act honestly, fairly, and professionally, in accordance with the best interests of its clients

  • This duty of care can be enforced by regulatory agencies through administrative law means

• (Markets in Financial Instruments Directive II, art. 70(6))

• In the cases of infringements (…) Member States shall, in conformity with national law, provide that competent authorities have the power to take and impose at least the following administrative sanctions and measures: (…) (f) in the case of a legal person, maximum administrative fines of at least EUR 5 000 000 … or of up to 10 % of the total annual turnover of the legal person according to the last available accounts approved by the management body; (…)’

• In cases of infringements administrative sanctions should be available

  • Traditional duty of care is linked to a fine, and member states must enforce despite being private

  • EU legislator obliged public enforcement

> This is how European private law supervision emerged

> Implement those standard into a private law framework

European supervision private law definition

Private law becomes part of a national public law framework, but the relationship is still horizontal in essence

• The duty of care is owed by the regulatory firm to the client

• Supervisor authority – EU law, therefore it upheld

A body of regulatory conduct of business rules of EU origin, to be observed by firms when dealing with their (potential) clients, which forms part of a framework for public supervision over a specified market and is subject to public enforcement

• EU rules set standards for how firms must behave toward their clients, and these rules are monitored and enforced by public authorities within a regulated market.

Concerns the relationship between a particular business and a public regulatory agency, but at the same time sets standards of conduct in the relationship between the regulated firm and its (potential) client and aims to protect the latter

• The system governs both the relationship between firms and regulators, and the relationship between firms and their clients, setting conduct standards to protect clients.

> hybrid legal field combining public and private law elements

Main characteristic:

• Regulatory nature

• Ex ante standard-setting by public authorities

  • Very often we have a more general standard, such as this general duty of care, which is specified in more concrete rules

  • Specifying the content of more open-ended norms

  • Such as administrative fines, but in order to know what a certain open-ended standard applies, it is important to specify the standard in advance through the ex-ante standard-setting

• Development outside the traditional private law system

  • Not part of the private law system

• Monitoring and enforcement by public authorities through administrative law means

  • Go to court, not wait for a regulatory agency to bring your case to court

> Not national private law in the traditional sense, but regulates relationship between private parties

Why European supervision private law?

Private enforcement alone does not suffice to ensure compliance with EU legislation affecting private law relationships

Member States are obliged to ensure public supervision and enforcement (e.g. consumer law, financial law)

The Role of the Public/Private Divide in Regulated Areas

Public and private law distinction is not very important when it comes to regulating markets

• It has blurred, not so clear cut anymore

• But the divide is not entirely irrelevant

Payment Services Directive (PSD) 2

• Authorisation and operation conditions for PSPs / public supervision of PSPs

• Ensuring the balance between the interests of PSP and consumer

  • Transparency / parties’ rights and obligations in relation to payment services

• Individual consumer redress:

  • Detailed liability rules allocating losses from fraud, forgery and error between PSPs & users / PSPs

  • Rules improving the procedural position of consumers (e.g. with respect to the burden of proof)

Both private and public law

Market in Financial Instruments Directive (MiFID) II

• Authorisation and operating conditions for ISPs / public supervision for ISPs

  • A high level of harmonisation of supervisory powers and administrative sanctions

• No individual investor rights

• No private law remedies under EU law for aggrieved investors:

  • Principle of civil liability ultimately not included

• Harmonising effects on national contract and tort law vary across the EU

Does not include private law remedies, no civil liability rule that ensures that you are compensated for damage

• General duty of care has been breached; you do not have any remedies?

• It depends on national law

PSD2 uses public and private law grammar, while MiFID II uses public law grammar, despite having similar objectives

> The distinction is not entirely irrelevant, public and private law divide indirectly plays a role

The woekerpolis-scandal (NL)

Investment insurance policies were sold in the NL, worth around 100 billion euros

• Really high investment returns for policy holders

• Usually pay out mortgage, or have income upon retirement

• People wanted to invest money safely for basic needs

High investment returns promised were never realised

• The money consumers thought that was invested, it was not, it went into pockets of investments companies who earned huge amount of money

• This meant for policy holders that they cannot pay mortgage or have income upon retirement

• Insurance companies denied any wrongdoing; they complied with the Third Life Insurance Directive – no remedies that would be applicable in a horizontal relationship

• Insurance companies claimed they provided all information

• Litigation before the Dutch civil court

Policyholders claimed, that because the insurance company failed to inform XXX under Dutch private law

• Dutch private law, the insurance companies had a duty of care, that included the duty to inform about the high cost of life insurance

• Insurance companies claimed that they did nothing wrong, as they complied with the information requirements under the Third Insurance Directive (public law)

Classical regulatory compliance defence:

• By complying with regulatory norms, they are not liable for breach of private law norms, therefore cannot be liable

The woekerpolis scandal in the Netherlands involved life insurance products sold as long-term investment plans (for mortgages or retirement).

Consumers were led to believe they would get high, stable returns, but in reality fees and costs were very high and often hidden, which significantly reduced the actual returns.

Insurance companies argued (regulatory compliance defence) they complied with EU regulations (like the Third Life Insurance Directive), but courts found that compliance with regulation was not enough. Under Dutch private law, insurers had a duty of care to properly inform customers, and they often failed to do so.

Relationship between EU market regulations and national private law

Three models:

• Separation

• Substitution

• Complementary

Whether the system used separation/substitution/complementary model

Separation model:

• EU regulatory private law rules form part of national public law and exist separately from national private law rules

• The former do not have any impact on the latter

> completely separate, EU rules belong to public law, they do not affect private law at all

Substitution model:

• EU regulatory private law duties become part of national private law and substitute pre-existing private law duties

• The latter may not impose additional stricter standards than the former, particularly in the case of minimum harmonisation at EU level

  • Maximum harmonisation: MS are not able to apply stricter rules

  • Minimum harmonisation: they can apply stricter rules

> If EU rules apply, they take over, national law cannot add stricter requirements

Complementary model:

• EU regulatory private law rules form part of national public law, but influence privatlaw rules

• The latter may impose additional stricter standards than the former, regardless of the harmonisation degree (maximum or minimum) at the EU level

> EU rules set a minimum standard, national private law can add stricter or extra duties

Has the public/private divide in regulated areas become superfluous

The public/private divide has blurred in regulated areas, particularly as a result of the Europeanisation of national law

The rise of legal hybrids

But the conceptual distinction between the categories of public and private law has not entirely lost its significance in EU and national law:

• It is a question of ‘more or less’ rather than of a sharp divide

• Useful to analyse the interplay between public and private law in regulatory standard-setting and enforcement