RUG2 - AL & MR Week 3

self- refgulation

private ordering - soft law

co-regulation

sits between self regulation and public regulation

logic of market regulation (3 principles)

- What is the goal or outcome to be achieved

- What standard of conduct is required from market participation

-What enforcement techniques are appropriate to ensure compliance

traditional regulatory techniques (1)

command and control regulation

new governance regulatory techniques (4)

- Principles - based regulation

- Meta-regulation

- Enrolment of gatekeepers

- Risk-based regulation

command and control

- Bright line rules which contain specific, often perspective and detailed, legal rules that leave little or no room for varying interpretation.

- Commonly backed by strict administrative or criminal sanctions overseen by a public authority (law as a threat)

e.g. speed limit

e.g. Covid-19 lockdown rules

e.g. requirements for authorisation

command and control strengths

legal certainty for public regulator and regulates

command and control weaknesses

- excessively prescriptive and detailed rules can be quickly outdated

- formalistic, often aggresive enforcement (e.g. US SEC)

- creative compliance

principle -based regulation

- Broad, general and purposive rules that may or may not be elaborated in further rules or guidance.

- The principle forms the 'backstop' to more detailed rules and acts as guide to their interpretation and application in particular instances.

- Public regulators focus on ensuring that regulates attain the purposes or outcomes of the regulation rather than technical compliance with detailed rules.

e.g. duty of care un relation to waste

e.g. investor protection regulation ''act honestly. fairly and professionally in accordance with the best interest of its clients

e.g. general duty of care of financial service providers

principle based strengths

A focus on ensuring that regulates attain the purposes or outcomes of the regulation rather than technical compliance with detailed rules.

principle based weakness

- Principle-based approach does not work with people who have no principles

- Considerable demands on the capacity of the public regulators and regulates

meta- regulation

- Management-based regulation which consciously relies on the internal management of firms to achieve the public goals set by the public regulator

- Regulates are required to develop their own systems to ensure compliance and to demonstrate that compliance to the public regulator

e.g. integrating due diligence into companies policies (corporate sustainability due diligence, art 7(1))

e.g. management bodies of investment of firms (markets financial instruments directive II, art 9(3))

meta regulation strengths

- A conscious reliance of the internal management of firms

- Greater flexibility in ensuring compliance

- Giving legitimacy to market governance

meta regulation weakness

- Internal systems and processes may be designed to achieve firms own goals rather than those of the public regulator

- Over reliance on firms having the appropriate culture and the right incentives to pursue public goals, and the public regulators, having sufficient skills, industry experience, and political support to challenge firms

enrolment of gatekeepers

- Public regulators involve others - commonly private actors as gatekeepers to control whether the regulates comply with regulatory requirements.

e.g. online platforms (digital services act, art 23(1))

e.g. credit rating agencies (credit rating agencies regulation, art (1))

enrolment of gatekeepers strength

Public regulators can enhance their regulatory capacity by leveraging off the control that they have over the regulates

enrolment of gatekeepers weakness

- The incentive structure of gatekeepers may not always be aligned with the regulatory goals (a financial product could be structured by a cow and we would rate it.

- Opportunities for gaming regulatory rules.

risk based regulation

- Public regulators systemically identify the different risks to their objectives and focus resources and regulatory effort on addressing most critical/serious risks

- The priorities made are explicit and transparent to all those within the public regulators organisation and to the regulates

e.g. member states action in a case of a serious risk to health and safety of its citizens (covid)

e.g. EU sanctions against products presenting a serious risk

risk based strengths

- Public regulators systematically focus resources and regulatory effort on addressing most critical risks

- Risk-based frameworks provide a clear, well-articulated set of priorities

risk based - weakness

- Risks are often contested

- Public regulators have to convey the image of being in control, while having to manage at once the conflicting demands of risks, resources and reputation (three R's)

Where do regulatory techniques lie in relation to private and public control?

Regulatory techniques lie on a continuum between private ordering and state intervention. They range from pure self-regulation (by private actors) to full public regulation (by state authorities), with forms like co-regulation and meta-regulation falling in between.

What is the key trade-off in using regulatory techniques?

Every strength that a regulatory technique has necessarily brings with it a weakness

Traditional and 'new governance' regulatory techniques are often combined with each other.

-

the use of public and private law in the context of marker regulation

The rise of legal hybrids (e.g. European regulatory private law; European supervision private law)

The role of the public/private divide in regulated areas

public law

- vertical

- public interests

- distributive (social) justice

--> Socially just distribution of goods in society (e.g. Taxes)

- public enforcement

--> by public authorities through public law means

--> ex ante compliance and deterrence

private law

- horizontal

- private interest

- 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 form private law today

- Public law focusses 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, criminal 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 seeks to ensure the balance between the interests of the parties through their respective rights and remedies.

- e.g. contract, tort law

logic of market regulation

- what is the goal or outcome to be achieved?

- What standard of conduct is required from market participants

- What enforcement techniques are appropriate to ensure compliance

dieselgate scandal

Volkswagen claims to have cars with ''clean'' diesel. —> clean diesel does not exist

(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

- Cleanse the marketplace for unfair practices to ensure the proper functioning of the internal market and consumer protection (unfair commercial practices directive)

Setting standard of conduct required form market participants

--> Prohibition of unfair commercial practices

--> Including: Misleading + aggressive commercial practices

Choosing enforcement techniques:

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

- Private enforcement through private law means: damages, a price reduction or termination of the contract

- Individual or collective

functional approach of the EU

- The EU legislators task in the context of market integration is viewed as problem-solving

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

- Public law and private law concepts are used as regulatory tools in novel in combination

- The EUs 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 --> European regulatory private law or hybrid regulations of markets

--> European supervision private law

Multi level system of governance

- Interaction between eu law and national is not only vertical. EU law relies on states to achieve it purposes.

- Supremacy of EU law —> eu law, rules over national law

european regulatory private law (examples)

- ''the producer shall be liable for damage caused by a defect in his product'' (product liability directive 1985. Art 1)

--> Strict liability regime

- unfair commercial practises shall be prohibited

A commercial practice shall be unfair if: it is contrary to the requirements of professional diligence, and it materially distort the economic behaviour with regard to the product of behaviour with regard to the product of the average consumer whom it reaches or to whom it is addressed or of the average member of the group when a commercial practice is directed to a particular group of consumer (...) (unfair commercial practices directive, art 5)

- in the case of an unauthorised payment transaction the bank refunds the payer to the amount of unauthorised payment transaction immediately. (Payment services directive 2, art 73(1))

--> Horizontal relationship

what is European regulatory private law

- 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.

- Private law is used as an instrument of European market integration

Why European regulatory private law?

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

--> But divergent national laws

--> And information asymmetry / imbalance of bargaining power between market participants

- Harmonisation of national laws to ensure:

--> A level of playing field for businesses

--> Adequate protection for consumers

--> Other public goals

Purely national solutions do not suffice

Neither do purely 'public law' instruments and enforcement mechanisms

challenges of European Regulatory private law

Many new challenge ahead

--> Digitalisation

--> Sustainability

European Regulatory private law (legal matrix)

- Eu law is transposed into national law/private law or has direct effect

- Many new laws are adopted in the form of an regulation that does not need transposition

- Rules that effect private institutions are also found in public law

European supervision private law

- market in financial instruments directive II, art 24(1))

- markets in finical instruments directive II, art 70 (6))

market 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

markets in financial instruments directive II, art 70 (6))

in case of infringement member states shall in conformity with naitional laws, provide that competent authorities have the power to take and impose at least the following administrative sanctions and measures

What is European supervision private law?

It refers to a body of EU-origin business conduct rules that:

• Govern horizontal relationships between regulated firms and their potential clients.

• Are integrated into national private law.

• Support public supervision of specific markets.

• Involve both public enforcement and protection of private clients, setting standards for how firms must behave toward clients while being overseen by public regulators.

Main characteristics of eu supervision private law

- regulatory nature

- Ex ante standard - setting by public authorities

- Development outside the traditional private law system

- Monitoring and enforcement by public authorities through administrative law means: duty of care makes no longer part of the traditional private law system. Regulatory standard that makes part of overall supervision of private law have been supervised by public authorities

why eu supervision private law

- private law alone does not suffice to ensure compliance with eu legislation affecting private law relationships

- Member states are obliged to ensure public supervision and enforcement

payment services directive

- 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 and users / PSPs

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

markets in financial instruments directive

- Authorisation and operating conditions for ISPs/public supervision of 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

- Harmonisation effects on national contract and tort law vary across the EU

Woekerpolis - scandal (NL)

- Since 1993, around 7 million of so called investment insurance policies, known as woekerpolissen

- High investment returns promised to policyholders by insurance companies

- Never realised as policyholders by insurance companies

- Never realised as policyholders payed high commissions and others costs to

- insurance companies (a total of EUR 20-30 billion)

Insurance companies were to comply with the public law oriented third life insurance directive (now Solvency II directive)

--> the civil court may impose additional information requirements under private law.

Woekerpolis scandal litigation before the dutch civil court

- The argument if aggrieved policyholders: by failing to inform us about the high costs of life insurance, insurance companies have breached their information duties towards us under Dutch private law and can therefore be held liable for damages

- The argument of insurance companies: the third life insurance directive as transposed into dutch financial supervision legislation (public law) does not require that we provide information about the costs of life insurance; as we have provided all other information required by this regulatory EU measures, we have also complied with out information duties under dutch private law and cannot therefore be held liable for damages (a regulatory compliance defence)

relationship between EU market regulation and national private law (3 models)

- seperation

- substitution

- complementarity: eu regulatory private rules form part of national public law, but nevertheless influence private law rules

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

substation 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 maximum harmonisation at EU level.

complementarity model

- EU regulatory private law rules form part of national public law, but nevertheless influence private law rules

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

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 accent rather than of a sharp divide

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