Category: Article

The Single Banking Supervisor: A giant’s step towards a genuine EMU?

Andrea Redondo
LL.M in European Law and Economic Analysis, College of Europe; BSc Economics and Finance, LSE; LLB, Université Paris 1 Panthéon-Sorbonne and Universidad Complutense of Madrid

 

Introduction

On 5 December 2012 a report signed by Mr. Van Rompuy (President of the European Council) in close collaboration with Mr. Barroso (President of the European Commission), Mr. Juncker (President of the Eurogroup) and Mr. Draghi (President of the European Central Bank) was issued, which outlined the steps to be adopted to tend towards a genuine Economic and Monetary Union (“EMU”).[1] The publication of this report marked the beginning of a new era for the EMU.

Shortly after, on 13 December 2012, the Council of the European Union agreed on its position on two proposals aiming at establishing a single supervisory mechanism (“SSM”) for the oversight of credit institutions. The first was a Proposal for a Council Regulation conferring specific tasks on the European Central Bank (“ECB”) concerning policies relating to the prudential supervision of credit institutions.[2] The second proposal aimed at amending the existing Regulation establishing the European Banking Authority (“EBA”).[3] This has been seen as a landmark event in the European construction and Commissioner Barnier has even gone as far as qualifying this as an “historical agreement”.[4]

The intention was to have the package voted by the European Parliament by the end of 2012 or beginning of 2013. For a series of reasons – of which some are more legitimate than others[5] – this vote has been delayed. It is however interesting to analyse at this point in time what the content of the proposal is and some questions which come to mind when reading the proposal, in the hope that some – if not all – will be answered by the time the final texts are adopted.

 

The content of the proposal in a nutshell

The purpose of the proposal is to establish a SSM, thereby:

“[conferring] on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions, with a view to contributing to the safety and soundness of credit institutions and the stability of the financial system within the EU and each Member State, with due regard for the unity and integrity of the internal market”.[6]

The ECB is expected to assume its supervisory tasks on 1 March 2014 or 12 months after the entry into force of the legislation, whichever is later.[7]

The main criteria for a financial institutions to fall under the ECB’s supervision is thus that it is systemic or, as the proposal states, that it is “significant”. The assessment of the significance of financial institutions is carried out on the basis of three criteria: (i) size; (ii) importance for the economy of the EU or any participating Member State; and (iii) significance of cross-border activities.

On the basis of these criteria, a financial institution is thus considered significant if the total value of its assets exceeds €30 billion, if the ratio of its total assets over the GDP of the participating Member State of establishment exceeds 20% (unless the total value of its assets is below €5 billion), or if the national competent authority considers that the institution is of significant relevance and the ECB confirms this following an extensive assessment. Furthermore, financial institutions which have requested or received public financial assistance directly from the European Financial Stability Facility (“EFSF”) or the European Stability Mechanism (“ESM”) cannot be considered less significant.[8]

It is expected that around 150 credit institutions will fulfil these alternative conditions and will thus fall under the prudential supervision of the ECB.[9] However, although 150 might sound like a large number, there are two very notorious categories of credit institutions which are clearly missing.

The first one is that composed by the credit institutions of the City in London. The reason underlying this exclusion is that the UK (together with Sweden and the Czech Republic) has managed to keep its own credit institutions aside from this proposal. The second category is that composed by the Sparkassen, the German local savings banks, which escape the ECB’s prudential supervision given that Germany managed to negotiate thresholds sufficiently high for these savings banks to fall out.

The proposals also states that:

“[on 29 June 2012] the Euro area Heads of State or Government Summit pointed out that when an effective single supervisory mechanism is established involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly which would rely on appropriate conditionality, including compliance with state aid rules”.[10]

Although this idea is only contained in a small paragraph within a 73-page document, its importance is clearly inversely proportional to its size. Although the direct recapitalisation of banks by the ESM is not yet a reality as it requires a decision of the Council to become operational, if it is finally adopted it will have a great impact on Member States’ public finances.

Amongst other reasons, one of the advantage of this system over the current system whereby the ESFS/ESM facilitate the funds to national treasuries which subsequently recapitalise national banks themselves is that the funds being transferred to banks will not come to increase Member State’s debt-to-GDP ratio as the funds will be perceived as coming from a different legal entity, the ESM. This is a very important fact as it will allow cutting the existing vicious circle between sovereigns and banks, something which has greatly contributed to the debt crisis in Europe.

 

Some unanswered questions concerning the proposals

It is undeniable that the Council’s proposals constitute a giant’s step towards a genuine EMU given the extensive powers which are granted to the single banking supervisor. However, the text of the proposal and the various press releases and press conferences that have accompanied it cannot clarify some unknowns which come to mind when reading the proposals. Some of the most flagrant ones are:

  • Why is it to be expected that the ECB will carry out a more precise and careful prudential supervision of systemic banks than national central banks currently do? At the end of the day, it seems that staff from national central banks is going to be transferred to Frankfurt, which entails that it will most likely be the same people carrying out the supervision of the same credit institutions, but simply from a different geographical location.
  • Is the “two-speed” supervision that the proposals are establishing desirable for the European credit sector itself? It is not difficult to imagine a situation where clients, considering that their interests are better protected when the supervision is carried out by the ECB than by national central banks, will transfer their savings to systemic institutions, leading to the disappearance of smaller credit institutions, thereby leading to a higher market concentration, which can have pernicious competition effects.
  • What implications will this have for the IMF and its financial intervention in Eurozone countries? Will the IMF be entitled to give instructions to the ECB on how to conduct its prudential supervision as it current does to national central banks having received financial assistance from the IMF? A well-thought answer is to be provided to this question if we do not want to see muddy relations within the Troika.
  • Although the proposals foresee a common backstop loss mechanism (the ESM), why does it not contain a common “safety net” for depositors, which is equally important and necessary for a genuine EMU to exist?[11] There won’t be a fully-fledged EMU until such mechanism is put in place in the EU.
  • When bank recapitalisations are carried out by Member States, State aid rules apply. But what will apply when the recapitalisation is done directly by the ESM? Wouldn’t there be a conflict of interest between the ESM’s underlying goal of maximising the returns on its loans and the purpose of State aid rules of limiting distortions on competition? It is to be expected that it will be broadly in line with the rules contained in Articles 107 and 108 TFEU but, what if it doesn’t? Could such decisions be challenged before the Court of Justice?

Conclusion

The two proposals of the Council are certainly to be seen as a giant’s step towards a genuine EMU as the SSM is undoubtedly a central instrument of any decent monetary union. However, and although many unresolved questions arise, there are two main things which are to be regretted: first, that not all Member States subscribed to this initiative (thereby further fostering a two-speed EU) and, second, that the proposal does not cover all the necessary instruments for a fully-fledged monetary union to exist (in particular, the common safety net for depositors is clearly missing[12]). We are therefore facing another clear example of what Robert Schuman had in mind when proclaiming that “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements (…)”.[13] The EMU is therefore no exception to this sequential nature of the EU construction, which needs to take another giant’s step to get to a truly genuine EMU.

[2] Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions: http://register.consilium.europa.eu/pdf/en/12/st17/st17812.en12.pdf

[3] Proposal for a Regulation of the European Parliament and the Council amending Regulation (EC) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards its interaction with Council Regulation (EU) No…/… conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions: http://register.consilium.europa.eu/pdf/en/12/st17/st17813.en12.pdf

[4] “Accord historique superviseur!”, see Commissioner Barnier’s tweet of 12 December 2013 on https://twitter.com/MBarnierEU

[5] Some of the most important reasons lying behind the delay in the vote of the proposal include the uncertainty surrounding the elections in Italy, the recapitalisation of Spanish banks and, more recently, Cyprus’ bailout.

[6] See Article 1, paragraph 1 of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

[7] See Article 27, paragraph 2 of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. However, given that the vote of the text by the European Parliament has not yet taken place, it is unlikely that the entry into force will occur before April or May 2014.

[8] See Article 5, paragraph 4, (a) and (b) of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

[9] A fortiori, all other credit institutions remain under the supervision of their respective national central banks.

[10] See whereas number 8 of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

[11] The system currently in place obliges Member States to guarantee individually €100.000 per depositor and per entity in case of bankruptcy of the credit institutions where funds were deposited.

[12] There is currently a proposal on the harmonisation of national deposit guarantee schemes, which includes provisions to ensure that sufficiently robust national deposit insurance systems are set up in each Member State. However, even if the report entitled “Towards a genuine economic and monetary union” states that “a rapid adoption of this proposal is important”, it is not clear when this proposal will be adopted, although it seems highly unlikely that its adoption will take place before June 2013.

Effective judicial protection in the European Year of Citizens 2013

Mehmed Yuseinov

LLB Law and European Studies graduate from the University of Portsmouth

 

In its practice exceeding more than fifty years, the Court of Justice of the European Union (CJEU) has developed several seminal legal principles with an aim to ensure a uniform and consistent application of the EU Treaties.[i] Guaranteeing smooth interpretation and application of EU law is not only an aspiration, but also the CJEU’s duty established under Article 19 of the Treaty on European Union (TEU).[ii] This article seeks to provide a general overview of the principle of effective judicial protection. It aims to outline the role of the EU and national bodies which can advise on EU citizens’ rights in cases of misapplication of Union law. Further, the article will appraise how the seminal principles developed by the CJEU enabled individuals to obtain remedies in their national courts.

Effective judicial protection can be interpreted in a three-stage process. The first stage concentrates on the question if the EU citizens are aware of their rights. The second stage is defined with the concept of access to justice. The final stage is focused on the effective co-operation between the national courts of the Member States and the CJEU and enforcement of the decisions of the national courts.

I.             Awareness of the protection of EU citizens’ rights

Protecting the rights of EU citizens and ensuring that the objectives of the concept of European citizenship are observed is a necessity. Although the 1957 EEC Treaty[iii] was silent on the protection of fundamental rights and European citizenship, from the 1970s onwards many initiatives have been put forward in order to establish a “Europe for Citizens”.[iv]

In the current Treaty framework, European citizenship and its objectives are defined in Art.20 TFEU[v] which identifies and accentuates the advantages of being an EU citizen. European citizenship provides us with many benefits: the rights to move, work and reside within the Union; right to study in another Member State; the right to vote in the European Parliament elections in the country where you reside and the right to receive protection from another EU Member State in the country you are visiting if your country of origin is not represented.[vi]

In 1975, Belgian Prime Minister Tindemans clearly enunciated that ‘[n]o one wants to see a technocratic Europe. European Union must be experienced by the citizen in his daily life.’[vii] Thus, if the EU seeks to fulfil its aspiration to create ‘an ever closer Union among the peoples of Europe’, it needs to place the citizen at the heart of its decision making.

The 2010 Eurobarometer survey[viii] revealed that the majority of the EU citizens were unaware of their rights granted by the EU.[ix] The purpose of the European Citizenship Report 2010[x] was to identify the obstacles to EU citizens’ rights and suggest practical solutions in order to overcome the problems that EU citizens might encounter. The outcome of the consultations was the launch of a website called ‘Your Europe’.  The web page provides practical information about Union citizens’ rights and about national rules and procedures from which the Union citizens can benefit. Another proposal in line with the European Year of Citizens 2013 includes the organisation and promotion of events on EU citizenship and citizens-related policies which will potentially increase the civic involvement and thus strengthen citizens’ awareness of their EU citizenship status.

II.           Access to justice: the role of EU and national bodies

Once EU citizens are aware of their rights, the second fundamental point which needs to be considered is which institutions or bodies can advise EU citizens on their rights? As the 2012 Eurobarometer survey[xi] revealed, the EU citizens need more information about where to turn in cases of violation of their EU rights.

On 6 December 2012, the Fundamental Rights conference was held in Brussels. The topic of the conference was access to justice and the speakers stressed that it is a fundamental matter as it not only ensures the democratic governance within the EU, but also ‘gives practical effect to the foundation stone of the rule of law on which the Union is built’.[xii]

Commissioner Reding in her speech in this conference[xiii] acknowledged that 21% of the EU citizens will turn to their national courts in cases of violation of their Charter rights and 20% will bring their case before the Ombudsman. What is surprising is that EU citizens are still unaware of the role of EU bodies such as SOLVIT or Europe Direct. This suggests that citizens require additional information about the role of EU bodies that can provide legal advice and aid. This can be achieved through co-operation with national media. The roles of national media are not only to inform us about the debates in our nation states, but also to educate us. The launch of a successful partnership with national media of the Member States could have huge benefits. The most valuable contribution would be that the EU could reduce the mistrust between itself and the EU citizens. Once citizens have an objective opinion about the benefits of EU membership then there will be also a decrease in the eurosceptic attitudes in the Member States.

III.         National courts of the Member States and the CJEU and effective enforcement of the national courts’ decisions

As noted earlier, the national courts seems to be the first place where the EU citizens will turn if they encounter misapplication of Union law. Thus, in theory if effective judicial protection exists in the EU, it can also be described as a result of an effective relationship between the CJEU and the national courts of the Member States. This relationship should be based on sincere co-operation and mutual respect as demonstrated by Art.4(3) TEU.[xiv] Maintaining effective relationship between the national courts and the CJEU is vital as in procedural terms individuals do not have the right to appeal to the CJEU. It is the national courts or tribunals of the Member States which have the discretion under Art.267 TFEU[xv] to decide whether or not to refer questions to the CJEU.

For example, the wording of paragraph 2 of Art.267 TFEU states that national courts, which are not the last instance in certain case, ‘may’ refer the question related to interpretation of EU law to the CJEU. This demonstrates that it is solely for the national courts to decide whether or not refer questions to the CJEU. This position is reaffirmed if the Court’s reasoning in CILFIT is taken into account where the Court stated that ‘in all circumstances national courts and tribunals (…) remain entirely at liberty to bring a matter before the Court of Justice if they consider it appropriate to do so’.[xvi] The national courts are enabled to use their discretionary powers not to refer to the CJEU if such question of law was irrelevant or was previously interpreted or when the doctrine of acte clair applies.

Entrusting the national courts of the Member States with such powers is an indication of a mature relationship between the national courts and CJEU. The potential positive outcome of such relationship means that straightforward cases are decided at national level by the national courts and the CJEU has more time to resolve more problematic cases. [xvii]

However, Article 267 TFEU makes a clear distinction between discretionary and mandatory references. For example, the Lyckeskog [xviii] judgment of the CJEU underlined that if a question concerning the interpretation of Union law arose before a court of last resort, it would be under an obligation to request a preliminary ruling in accordance with Art.267 TFEU, either when analysing admissibility or at a later stage. This position was reiterated in the Köbler[xix] case where the CJEU held that non-compliance by a top national court with its obligations under Art.267(3) might render the state in which it is situated liable in damages to an individual who was in that way deprived of his rights under EU law.

One should note, that the relationship between the CJEU and the national court in proceedings under Art.267 TFEU is co-operative rather than hierarchical in nature. Both courts have distinct but complementary roles to play in finding a solution to the case which is to be solved in accordance with EU law. A reference to the CJEU is not an appeal against the decision of the national court. The CJEU does not rule on the application of the law to the facts or the compatibility of national law with the requirements of EU law. These are matters within the exclusive jurisdiction of the national court.

It is also the national courts of the Member States which will award remedies to individuals. Nevertheless, from the early 1990s onwards the Court has requested adequacy and effectiveness in the award of remedies in the domestic enforcement of Union law. As De Burca notes, national courts are required to undertake a case-by-case review of the national rules and disapply any restrictive national provisions whenever necessary in order to award adequate and effective remedies in the spirit of EU law. [xx] This is primarily because national remedies must secure the effectiveness of EU rights.[xxi]

IV.         Conclusion

Effective judicial protection is a fundamental right of EU citizens and, as a result, EU citizens must be aware of their fundamental rights so that they can understand in practice the benefits of their EU citizenship status. Thus it is suggested that the efforts of the EU in the European Year of Citizens 2013 should be primarily focused on educating and informing citizens about their rights and providing information about EU legal advice and aid centres. These are the two fundamental points which will ensure that effective judicial protection finds its place not only in theory, but also in practice.

[i] Consolidated versions of the Treaty on European Union and  the  Treaty on the Functioning  of the European Union  [2010]  OJ  C 83/1.

[ii] Consolidated version of  the  Treaty  on European Union [2010]  OJ  C 83/1.

[iii] Treaty Establishing the European Economic Community, March 25, 1957, 298 U.N.T.S. 11.

[iv] Tindemans, Leo, ‘ European Union. Report by Mr. Leo Tindemans, Prime Minister of Belgium, to the European Council. Bulletin of the European Communities, Supplement 1/76.’ (1975)  http://aei.pitt.edu/942/1/political_tindemans_report.pdf accessed 10 January 2013.

[v] Consolidated version of  the  Treaty  on the Functioning of the European Union [2010]  OJ  C 83/1.

[vi] Consolidated version of  the  Treaty  on the Functioning of the European Union [2010]  OJ  C 83/1.

[vii] Tindemans, Leo, ‘ European Union. Report by Mr. Leo Tindemans, Prime Minister of Belgium, to the European Council. Bulletin of the European Communities, Supplement 1/76.’ (1975), page 12 http://aei.pitt.edu/942/1/political_tindemans_report.pdf accessed 10 January 2013

[viii] European Commission, ‘Flash Eurobarometer: European Union Citizenship Analytical report’ (2010) http://ec.europa.eu/public_opinion/flash/fl_294_en.pdf accessed 10 January 2013.

[ix] Although the majority (79%) of EU citizens claim familiarity with the term “citizen of the European Union”, only 43% say they know its meaning and  less than one-third (32%) of respondents from the 27 EU countries consider  themselves well informed about their rights as citizens of the European Union.

[x] European Commission, ‘the European Citizenship Report 2010’ (2010) http://ec.europa.eu/commission_2010-2014/reding/factsheets/pdf/citizenship_report_en.pdf accessed 10 January 2013.

[xi] European Commission, ‘Speech – A European Union grounded in justice and fundamental rights’ (speech, 6 December 2012)  http://europa.eu/rapid/press-release_SPEECH-12-918_en.htm?locale=en  accessed 16 December 2012.

[xii] European Commission, ‘Speech – A European Union grounded in justice and fundamental rights’ (speech, 6 December 2012)  http://europa.eu/rapid/press-release_SPEECH-12-918_en.htm?locale=en accessed 16 December 2012.

[xiii] Ibid.

[xiv] Consolidated version of the Treaty on European Union [2010] OJ C83/01.

[xv] Consolidated version of the Treaty on the Functioning of the European Union [2010] OJ C83/01;

[xvi]Case 283/81  Srl CILFIT and Lanificio di Gavardo spA v Ministry of Health [1982] ECR 341, para. 15.

[xvii] P Craig and G De Burca, EU Law: Text, Cases and Materials (4th ed., OUP 2008) 478-479; T Tridimas, ‘Knocking on Heaven’s Door: Fragmentation, Efficiency and Defiance in the Preliminary Reference Procedure’ (2003) 40(1) CMLR 9, 12.

[xviii] Case C-99/00 Criminal Proceedings against Lyckeskog [2002] ECR I-1327.

[xix] Case C-224/01 Gerhard Köbler v Republik Österreich [2003] ECR I-10239

[xx] P Craig and G De Burca, EU Law: Text, Cases and Materials (4th ed., OUP 2008) 306.

[xxi] P Craig and G De Burca, EU Law: Text, Cases and Materials (4th ed., OUP 2008) 312.

Radu judgment: A lost opportunity and a story of how the mutual trust obsession shelved human rights

Ermioni Xanthopoulou

PhD Candidate, King’s College London

 

On 29th January 2013, the Court of Justice of the European Union (CJEU) delivered its judgment in the Radu case.[i] In this case the Court was asked to interpret the Framework Decision on the European Arrest Warrant (FDEAW) through the prism of the Charter of Fundamental Right of the European Union (the Charter) and the European Convention of Human Rights (ECHR).

While this judgment was expected to open the door to a more human rights-enshrined interpretation of the European Arrest Warrant (EAW), the Court seems to have skipped this chance.

European Arrest Warrant basics

The EAW is the first EU criminal law instrument based on the principle of mutual recognition, the so-called cornerstone of European Criminal Law. Having provoked constitutional concerns for abolishing the requirement of double criminality for a list of offences, after ten years it is still here accompanied by the never-ending debate.

The EAW is in fact a judicial decision, issued by the judicial authorities of one Member State (MS), requesting the arrest and surrender of a person from the judicial authorities of another MS for the purposes of (a) conducting a criminal prosecution (b) executing a custodial sentence or (c) detention order. It replaced a slow and politicised mechanism of interstate cooperation in view of the need of faster extradition in the EU internal market. This mechanism is based on the assumption of advanced confidence between the Member States.

Therefore, the state executing the EAW is under the obligation to arrest the wanted person and surrender him to the issuing state, except where the grounds for refusal listed in the FDEAW exists. What usually strikes lawyers is that there is no specific ground for refusal for human rights violations by the issuing authority, which gives no choice to the executing authority but to arrest and surrender the requested person even in the case that the act he committed does not constitute an offence in the executing state and even if his fundamental rights were not observed by the issuing state or there is a high risk of them being violated in view of the bad human rights protection record of this state.

Hence, a new argument has emerged in the light of the de-pillarisation of EU criminal law after the Lisbon Treaty and after the binding effect was given to the Charter. This new argument attempts to establish that the interpretation of the FDEAW should be enriched by the respect for fundamental rights as illustrated by the Charter. Also, the Commission in its latest implementation report[ii] states that ‘the framework decision does not mandate surrender where an executing judicial authority is satisfied…that such surrender would result in breach of a requested person’s fundamental rights arising from unacceptable detention conditions’.

This view is further supported considering the recent N.S. judgment of the CJEU. This case concerns the EU asylum system which is also based on the same principle of mutual recognition as the EU extradition system. The Court ruled that the Member states may not transfer an asylum seeker to the Member State responsible, where they cannot be unaware that systemic deficiencies in the asylum procedure and in the reception conditions amount to substantial grounds for believing that the asylum seeker would face a real risk of being subjected to inhuman or degrading treatment.

Facts of Radu

So, in our story, Mr Radu was a Romanian national, subject to four arrest warrants, issued by the German judicial authority for the purpose of conducting criminal prosecutions in respect of acts of robbery. As he did not consent to his surrender, he claimed that the contested warrants were issued without him having been summoned or having had a possibility of hiring a lawyer or presenting his defense, in breach of Articles 47 and 48 of the Charter and Article 6 of the ECHR.

He argued that the FDEAW and the law implementing it should be interpreted in view of the provisions of both the Charter and of the ECHR. If the judicial authorities of the executing Member State discovered that the fundamental rights were not observed by the issuing authorities, they would be justified in refusing to execute the EAW concerned, even if FDEAW does not expressly provide for that ground for non-execution.

In a nutshell, the questions raised highlight three main issues. Firstly, they involve the different interpretation of the FDEAW in light of the Treaty of Lisbon and the Article 6 TEU and question whether the Charter and the ECHR form part of the primary EU law. Secondly, the questions concern the issue of deprivation of liberty of the requested person, as part of the procedure leading to the execution of the EAW. Since it interferes with the right to liberty and security of a person (Article 6 Charter and Article 5 ECHR read in conjunction with Articles 48 and 52 Charter) the CJEU was asked whether if this is actually necessary and proportionate to the objective pursued in a democratic society. Thirdly, they ask whether, through the prism of this new interpretation, the executing judicial authority can refuse to execute the EAW in the event of breaches of human rights legislation.

Opinion of Advocate General

The Advocate General Sharpston in her well reasoned opinion[iii] interestingly claimed with regard to the first issue that rights emanating from the Charter constitute part of the primary EU law, while the rights originating from the ECHR constitute general principles of EU law.

In respect of the second issue, the Advocate General argued that the deprivation of liberty and the forcible surrender of the person, following the execution of the EAW, especially issued for the purpose of criminal prosecutions, constitute interference with the person’s right to liberty as it is safeguarded by the Article 5 ECHR and Article 6 Charter. For this reason, it should not be arbitrary. The factors which should be taken account include the good faith in which the detention should be performed, the fact that it should be interrelated to the ground of the detention (suitability and effectiveness), the place should be appropriate and the length reasonable (necessity and least restrictive measure test).

With reference to the third point, the Advocate General Sharpston argued that the executing judicial authority could refuse to execute a warrant, when it is demonstrated that the rights of the requested person have been infringed or will be infringed and, in the current case with regard to Articles 6, 47 and 48 Charter, the infringement should be such fundamental that would destroy the fairness of the process.

Judgment

The judgment did not follow the structure of the questions or the conceptual structure given by the Advocate General, confusing its reader despite its short length. However, this is the least, considering that it limited the scope of the preliminary reference and that certain questions remained unanswered.

The CJEU appeared to accept that the Charter constitutes primary law but, according to the Court, the observance of rights enshrined in Articles 47 and 48 of the Charter does not require that the executing authority could refuse the execution of the EAW (Para 39). The Court attempted to clarify in advance that the Radu case related to an EAW issued for the purpose of conducting criminal prosecutions and not for the execution of a custodial sentence (Para 28). Then, it reiterated that the EAW was adopted so that it would simplify the extradition and for its operation which is based on the principle of mutual recognition, states should have mutual trust. Therefore, states cannot flee from an EAW request (Para 33-35).

With respect to grounds of refusal it remained loyal to the letter of the instrument. It left no space for any interpretation enlightened by the Charter sun or even by the Article 1(3) of the Framework Decision on EAW, read in conjunction with Article 6 TEU and the corresponding Charter provisions. Moreover, in an attempt to deepen this view and further justify it, it claimed that if the person was to be heard before the issuing authority, this would inevitably affect the effectiveness of the instrument. This is because the EAW is based on surprising the wanted person so that he could not catch a flight and flee (!) (Para 41). Finally, pursuant to the Court there is always the executing authority to hear the requested person.

Regarding the issue of whether the deprivation of the person’s liberty accompanying the process of arrest interferes disproportionately with the right to liberty and security, the Court just ruled that it is related to the debate on the defense rights.  Thus the Court claimed that the issue does not necessitate special attention, tackling the request to address the breach of those articles (Para 30).

Therefore, in contrast to the opinion of Advocate General Sharpston, according to the Court the FDEAW should be interpreted in such a way so as not to allow the executing authority to refuse the execution of a EAW issued for the purpose of criminal prosecution on the ground of violation of the requested person’s right to be heard.

Comment

The Radu judgment surprised EU criminal lawyers anticipating the post-Lisbon effect on the interpretation of the EAW for its minimalistic and narrow approach. It was an unexpectedly short judgment given the number and the significance of the questions. The Court avoided the substance of the burning issues and narrowed down the scope of the references, causing further questions.

Firstly, it should be noted that the judgment contradicted the Advocate General opinion and the previous CJEU ruling in N.S. case, where it had clarified that the EU asylum system cannot operate on the basis of a “conclusive presumption” that all EU Member States “observe the fundamental rights of the European Union” (Para. 105). In Radu, the Court, based on this conclusive presumption, repeated the need and the obligation of Member States to have mutual trust to each other, in contrast to the abovementioned N.S. judgment. One would wonder here, whether the fact that the issuing state was Germany in this case facilitated the Court to follow this ruling and whether it would have adjudicated differently if the issuing country was one of the so-called ‘non-safe countries’.

The first paragraph of the Court is also noteworthy, since the Court stated that the warrant was issued for the purpose of a prosecution and not for the execution of a custodial sentence. This triggers the question whether the ruling would be different if this was the case of an EAW issued for the execution of a custodial sentence and Mr Radu was requested for this purpose? Would the Court have defied the mutual trust obsession?

Moreover, the Court, after exposing the reasons leading to the adoption of the EAW, argued that if the issuing authority would be required to hear the requested person, this would lead to the failure of the system. The framework decision’s preamble articulates that the extradition procedures should be speeded up in respect of persons suspected of having committed an offence and trying to escape from justice. This is why the system’s key method is to surprise the requested person so as not to allow the possibility of run away (Paras 40, 41). This reasoning, realistic as it may sound in a Europe without internal borders, lacks the most principal constitutional ground. The principle of presumption of innocence, as enshrined in the Article 48 of the Charter and 6(2) ECHR, pronounces that ‘everyone who has been charged shall be presumed innocent until proved guilty according to law’. Isn’t surprising a suspect with the aim of arresting him, then surrendering him to another Member State in order to prosecute him, without any hearing at odds with the presumption of innocence?

The Court’s response was that the person can be heard by the executing judicial authorities. Someone would wonder at this point which the options of the judicial authorities really are, as the Court previously ruled that the states cannot flee from the EAW mechanism which does not provide a ground for refusal for human rights violations (Para 41) So, the scope of the person’s right to be heard is really limited to this point.

Finally, a question of constitutional importance was submitted which finally remained unanswered. The Court skipped the question on whether

the interference on the part of the State executing a EAW with the rights and guarantees laid down in Article 5(1) of the [ECHR] and in Article 6 of the [Charter] (:right to liberty), read in conjunction with Articles 48 (:presumption of innocence) and 52 thereof, with reference also to Article 5(3) and (4) and Article 6(2) and (3) of the [ECHR] (:fair trials rights), satisfy the requirements of necessity in a democratic society and of proportionality in relation to the objective actually pursued.

This could have been a chance for the Court to throw light on the ill-defined constitutional principle of proportionality in relation to the objective actually pursued through legislation in the context of European criminal law.

Due to those remaining question marks, the judgment was surprising and somewhat disappointing. Trying to explain the mystery of this analysis, we could hypothesize that the Court might have been aware of the domino effect of a different ruling on the principle of mutual recognition, the foundation of the whole mechanism. This effect, given the lack of a clearly delineated ground for refusal for the execution of EAW in the event of human rights breaches, could be an open-ended one, especially if there is no political will to reform the measure soon.

[i] Case C-396/11 Ciprian Vasile Radu [2013] judgment of 29 January 2013, ECR-0000.

[ii] Report from the Commission to the European Parliament and the Council, On the implementation since 2007 of the Council Framework Decision of 13 June 2002 on the European arrest warrant and the surrender procedures between Member States, Brussels, 11.4.2011 COM(2011) 175 final

[iii] Opinion of AG Sharpston in Case C-396/11 Ciprian Vasile Radu [2013] ECR-0000.

What They Signed For – An Introduction to the Unified Patent Court

Justin Koo LLB, LLM

PhD student, Dickson Poon School of Law, King’s College London

 

Introducing the UPC

According to the European Commission, the Unified Patent Court (UPC) is one of the primary aspects of the ‘patent package’ that was given the go ahead by Member States and the European Parliament on the 11th December 2012. Included within this ‘patent package’ are two Regulations[1] that were adopted on the 17th December 2012. The next aspect comprises of the international Agreement[2] on a Unified Patent Court[3] that was signed on the 19th February 2013.[4] The final phase is the establishment of a single and specialised patent jurisdiction.[5] However, the focus of this article is limited to the signing of the international Agreement that paves the way for the establishment of the UPC.

With that in mind, it is useful to note briefly the historical background of this continuing movement. The journey, or rather, the struggle toward unitary patent protection in the EU has been ongoing for at least the last thirty years.[6] As a result the receipt of twenty-four signatures for the Agreement on a Unified Patent Court has been marked with importance although it was anticipated that at bare minimum, the thirteen signatures required would have been obtained. The Republic of Ireland’s Minister for Jobs, Enterprise and Innovation who commenced the proceedings at which the Agreement was signed echoed this sentiment:

“I think this is a very significant occasion. I know that this has been a product of work over many years – indeed over almost 40 years from when the idea was first nurtured as a concept… We are very fortunate to be here to sign on behalf of our Member States this important piece of new architecture within the European Union.

What is certain is that the perceived implications of developing the UPC from a preliminary perspective are seen as positive not just to the development of the patent law system within the EU, but more importantly continuing the furtherance of the single market.

 

What they signed up for

For now, it is important to outline the specifics of what the Member States signed up for on the 19th February 2013. As already pointed out, twenty-four countries had signed the Agreement. It is expected that Bulgaria will also sign shortly.[7] However, Poland has opted for a ‘wait and see’ policy before it signs, given their uncertainty over the effects that joining may have on their economy.[8] They argue that the comparative costs of joining the UPC may not be beneficial to them given that their country is not a very innovative one. Thus the cost benefits marketed by the EU in using the UPC may simply not be realised in Poland. On the other hand Spain has chosen not to partake in any way or form[9] because the Spanish language had not been included as one of the official languages of the UPC. Notwithstanding that the Agreement has been signed, it is still to be ratified by France, Germany, Ireland and the UK. In the instance of the UK, “CIPA, the IPFed and other professional bodies have written to the IP Minister Lord Younger calling for a proper, evidence-based economic impact assessment…before Parliament is asked to ratify the UPC Agreement[10].” Hence, it may be some time before the UK ratifies the Agreement.

In terms of structure, the UPC will be divided into two main parts. Firstly there is the Court of First Instance that will have its centre in Paris with additional ‘thematic’ branches in London[11] and Munich.[12] Secondly the Court of Appeal will be based in Luxembourg and also house the Registry. In addition to these major institutions, each Member State will also have at least one local division.

But what does the UPC mean for the EU as a whole? In short, it means the centralisation of ‘EU Patent’[13] litigation given that Regulation 1257/2012 of the ‘patent package’ gives the European Patent Office (EPO) the power to grant EU Patents.[14] The UPC acts as the central court for resolving patent disputes in the EU concerning the aforementioned EU Patents, meaning it will no longer be necessary for EU Patent holders to contest patent claims for infringement or revocation on a country-by-country basis. Furthermore the decisions of the UPC will be binding throughout the Member States that have signed on. More generally the advantages of having the UPC and the ‘patent package’ as a whole include:[15]

  • One stop shop for patent application and litigation
  • Cost effectiveness
  • No need for translations once the patent is in English, French or German
  • Central administration being more efficient avoiding duplication of cases in multiple Member States
  • Expert judges
  • Furtherance of the single market

 

Problems so far…

Despite the many perceived advantages of the UPC there will inevitably be problems that arise in relation to its scope or operation. One such problem that has been raised at this preliminary point is under Article 83 of the Agreement on a Unified Patent Court where there is some disagreement on the interpretation of Article 83. In essence, Article 83 entitled “Transitional regime” is about facilitating the move toward the UPC. Under Article 83(1) a seven year transitional period is given whereby a European Patent claim can be brought before national courts instead of the UPC. However, after the seven year transitional period, the UPC will have exclusive competence over EU Patent claims. This is not disputed. Where it becomes unclear is under Articles 83(3) and 83(4), creating confusion with its opt-out clause. Some preliminary debate has already led to diverging interpretations of what happens if the patentee opts out. On the one hand, Article 83(3) can be seen as a means of extending the seven year transition period so that even after this period has expired, the UPC will not have exclusive competence. On the other, a patentee that has opted out can bring his claim under a national court or alternatively opt back in via Article 83(4) and still bring a claim under the UPC. It is the possibility of opting back in that is the real source of confusion because of the potential for absurd results especially where third parties become involved. For example consider the following hypothetical fact pattern:[16]

A PATENTEE opts out of the UPC under Article 83(3) and then licenses the patent to an EXCLUSIVE LICENSEE. The EXCLUSIVE LICENSEE then brings an infringement claim against a THIRD PARTY and uses the UPC by opting in under Article 83(4). The THIRD PARTY wants to counterclaim the invalidity of the patent and subsequently for the revocation of the patent.

Given the construct of Article 83(3) and 83(4) it is open to the interpretation where the THIRD PARTY can file his counterclaim. Two possible scenarios arise:

1)    On a liberal interpretation of Article 83 the THIRD PARTY can choose where to file the counterclaim. That is at the UPC or at the national courts. This interpretation in effect would ignore the fact that the PATENTEE has opted out. More generally it would mean that the UPC retains non-exclusive competence even if a patentee opts out under Article 83(3).

2)    Alternatively on another interpretation, if Article 83 is construed more rigidly and the fact that the THIRD PARTY cannot counterclaim for revocation against the EXCLUSIVE LICENSEE is considered then the THIRD PARTY must file a separate claim for revocation in the national courts because the PATENTEE has opted out. Therefore the UPC has no competence. This interpretation would undermine the very rationale of the UPC in centrally administrating EU Patents.

However, given the infancy of the UPC debates, no conclusive answer has yet been proffered. As such the outcome remains to be seen. It may be some time before we see the UPC in practical effect given that it does not enter into force until France, Germany and the UK have ratified the Agreement. It is estimated that the UPC should come on stream some time in 2014. But until then the discussion continues…

[1] Regulation (EU) No 1257/2012 implementing enhanced cooperation in the area of the creation of unitary patent protection

Council Regulation (EU) No 1260/2012 implementing enhanced cooperation in the area of the creation of unitary patent protection with regard to the applicable translation arrangements

[2] It is termed an international agreement because it was decided that the Agreement would be concluded outside the institutional framework of the EU but would exclude non-EU parties. – Council of the European Union, ‘The long road to unitary patent protection in Europe’ (EU Factsheet, 17 December 2012) <http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/intm/134393.pdf> accessed 6 March 2013, 3

[4] It is an international agreement because it was signed outside the scope of the EU – Council of the European Union, ‘Unitary patent protection: a big leap towards innovation for EU companies’ (Brussels, 17 December 2012) 17824/12

[5] European Commission, ‘The patent reform: Unitary patent protection and the Unified Patent Court’ (20 February 2013) <http://ec.europa.eu/internal_market/indprop/patent/index_en.htm> accessed 4 March 2013

[6] European Commission, ‘EU UNITARY PATENT: EUROPEAN PARLIAMENT AND COUNCIL GIVE GREEN LIGHT’ (11 December 2012) <http://ec.europa.eu/commission_2010-2014/barnier/headlines/news/2012/12/20121211-2_en.htm> accessed 4 March 2013

[7] Council of the European Union, ‘Signing of the Unified Patent Court Agreement’ (Brussels, 19 February 2013) 6590/13

[8] World Intellectual Property Review, ‘Will Poland join the Unitary Patent system?’ (5 February 2013) <http://www.worldipreview.com/news/will-poland-join-the-unitary-patent-system> accessed 4 March 2013

[9] See M Richardson, ‘UPC – The Ratification Update Game’ (IPcopy, 28 February 2013) <http://ipcopy.wordpress.com/2013/02/28/upc-the-ratification-game-update/> accessed 4 March 2013

[10] Annsley Ward, ‘We can sign-up, but can we opt-out?: 24 Member states sign Unified Patent Court Agreement’ (IPKat, 19 February 2013) <http://ipkitten.blogspot.co.uk/2013/02/we-can-sign-up-but-can-we-opt-out-24.html> accessed 4 March 2013

[11] The London cluster focus will be chemistry including pharmaceuticals.

[12] The Munich cluster focus will be on mechanical engineering.

[13] ‘EU Patent’ capitalised for sake of clarity in referring to the subject of the UPC claims rather than ‘patents’ in general

[14] Article 3 of Regulation 1257/2012.

[15] EU Focus, ‘Unitary patent regime finally agreed’ (2013) EU Focus 1, 1-2

[16] ipcopyemily, ‘Transitional provisions and the competence of the UPC: A response to Amerikat’ (IPcopy, 20 February 2013) <http://ipcopy.wordpress.com/2013/02/20/transitional-provisions-and-the-competence-of-the-upc-a-response-to-amerikat/> accessed 5 February 2013

Towards a Financial Transaction Tax: the Commission’s proposed Directive of February 14

Pierre-Antoine Klethi

LLM Candidate, King’s College London

 

The issue of introducing a financial transaction tax (hereinafter – FTT) at the EU’s border came back in the frontline in the aftermath of the financial crisis, as an option to “moralise capitalism”. However, the idea appeared to be highly controversial, so that no agreement could foreseeably be reached on an EU-wide basis.

As a result the process for enhanced cooperation in this area was launched. Following the request of eleven Member States – Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain – on 22 January 2013, the Council adopted Decision 2013/52/EU[i] authorising enhanced cooperation in the area of financial transaction tax. Consequently, on 14 February the Commission issued a proposal for directive[ii]. For us, it is the occasion to (re)discuss the concept of enhanced cooperation (I), the competences of the EU in fiscal matters (II) and the idea of FTT itself (III).

I. How does enhanced cooperation work?

The enhanced cooperation procedure (see also the article of Jose Manuel Panero Rivas on this blog), was first introduced by the Treaty of Amsterdam of 1997. It aims at enabling Member States that wish to deepen further the integration to do so without being held back by the opposition of other Member States, which is particularly problematic in situations where the Council must vote unanimously to adopt a decision. The possibility of enhanced cooperation is currently regulated by Article 20 TEU[iii] and Articles 326 to 334 TFEU[iv].

The scope of enhanced cooperation can only be “within the framework of the Union’s non-exclusive competences”, since for EU exclusive competences, there can be no distortion of rules. In the FTT case, fiscal policy is indeed a non-exclusive Union competence (see part II below). To avoid distortions to the internal market that could appear following the adoption of national measures taxing the financial sector, the Commission decided to make use of Article 113 TFEU, which gives some competences of harmonisation to the Council regarding tax matters.

Furthermore, the enhanced cooperation procedure “shall aim to further the objectives of the Union, protect its interests and reinforce its integration process”. It is also evident that “any enhanced cooperation shall comply with the Treaties and Union law”, “shall not undermine the internal market”, nor “distort competition between [Member States]”. In the present case, the main aim is to “ensure the proper functioning of the internal market and to avoid distortion of competition”. But one may also think of the objective of building a “social market economy”, which could entail the fact that all economic actors shall pay a fair share of taxes.

In addition, enhanced cooperation is a solution of last resort, to be used only if “the objectives of such cooperation cannot be attained within a reasonable period by the Union as a whole”. Regarding the FTT, this was noted by the Council in June 2012, as there was no unanimous support to the proposal of introducing an EU-wide FTT.

Furthermore, in conformity with the Treaties, at least nine Member States could ask the Commission to make a proposal of enhanced cooperation to the Council. In the case of the FTT, they were eleven (see above).

In principle, having received a request to make proposal for enhanced cooperation in certain area, the Commission may refuse to make the proposal; in that case, it shall explain the reasons for it. Enhanced cooperation needs to be approved by the Council, after having obtained the consent of the European Parliament. In the field of the Common Foreign and Security Policy (CFSP), there are some specific rules set in Article 329(2) TFEU.

It should be noted that participation must remain open to any Member State wishing to join it at any time. In that case, the State shall notify the Commission of its will; the Commission then has four months to assess whether the conditions are met. The TFEU even requires that participation in the procedure be promoted. The “competences, rights and obligations” of non-participating Member States shall be respected; on the other hand, these Member States “shall not impede [the] implementation” of enhanced cooperation.

All Member States participate in the discussions, but only those participating in the enhanced cooperation procedure have the right to vote. Naturally, only the participating Member States are bound by decisions adopted under enhanced cooperation, and these rules do not form part of the acquis communautaire that candidates to EU membership are required to accept.

Enhanced cooperation is already being used in divorce law (by 14 Member States, which will be joined by Lithuania next year) and will be used for the creation of an EU patent (all Member States but Italy and Spain agreed to join).

II. The Union’s fiscal competences

In this context it is worth to quickly remember a few facts about the Union’s competences on fiscal matters.

On the one hand, the Union is competent to legislate on indirect taxes (i.e. on consumption, e.g. the VAT which has been subject of many directives). Article 113 TFEU, which is referred to in the present case about enhanced cooperation on the FTT, states that: “The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.”

On the other hand, the Union is not competent to harmonise direct taxes (i.e. on production of goods and services, e.g. corporate tax), except if the Member States unanimously decide so. However, although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with Community law[v]. Thus, in the area of free movement, not only are the custom duties and charges having an equivalent effect prohibited (Article 30 TFEU), but internal taxation measures must also be applied in a non-discriminatory manner to domestic and foreign (EU) products, so as to avoid protection of some products (Article 110 TFEU).

III. The Financial Transaction Tax: pros and cons

The proposal of the Commission[vi] is to establish a levy of 0.1% on transactions of bonds and shares and 0.01% on transactions of derivative contracts. Using these numbers, a Union-wide FTT could bring in nearly €60 billion, which could potentially enhance the Union’s own resources in its budget.

Only transactions between financial institutions would be taxed, not those involving businesses and citizens (the latter being involved in a minor share of all financial transactions), nor those involving the States managing their public debts. In addition, it is worth noting that primary market transactions in shares and bonds (i.e. when these financial instruments are sold for the first time by their issuers) will remain tax free. Furthermore, the FTT would be applied to all transactions of instruments issued in a Member State, even if the ulterior transactions take place outside the EU; this aims at avoiding tax avoidance but is highly controversial and is likely to create heated debates with EU’s international partners. A further idea looking rather strange is that an exchange of financial instruments is considered as two transactions (selling and buying), leading to a taxation in the Member State of residence of both the seller and the buyer (so, the effective rate per transaction – but not per party – is double). A party to the transaction residing in a third country will be deemed to be resident in the Member State of its EU counterparty. Finally, the Commission recognised the possibility of double taxation between FTT and non-FTT jurisdictions, but this could prove an incentive to join the FTT-area.

Those in favour of such a tax claim that the financial sector should pay a fair share of the collective tax burden, especially since it benefited from very costly rescue plans during the financial and economic crisis in 2008-2009. Moreover, banking institutions of some countries still continue to benefit from State aid because of their exposure to the debt crisis in the Eurozone. Furthermore, this debt crisis requires the Member States to find new resources. Since labour is already heavily taxed in most of them, they must turn to taxes on capital. Capital revenues are also seen as less “meritocratic” than labour revenues. Last but not least, taxing financial transactions would discourage speculation and therefore contribute to “moralising capitalism”.

On the other side, those opposing the introduction of the FTT fear a loss of competitiveness of Europe’s financial centres (this fear is particularly acute in the UK, preoccupied about safeguarding the City’s worldwide importance and influence), since investors would prefer to use their money somewhere else where it is less taxed[vii]. So, there would be less investment in the EU, which could lead to less growth and losses of jobs, in particular in the financial centres. But the Commission considers that the 11 participating Member States are economically too important to be abandoned by financial actors. Other arguments of opponents to the FTT can be mentioned, such as the fact that some speculation is necessary to ensure the liquidity of the markets, etc. All those arguments are subject to fierce economic debate not only between Member States, but also between economists.

Where are we now?

Following the request of the 11 interested Member States, the Commission accepted to resort to enhanced cooperation on 23 October 2012. The European Parliament then gave its agreement on 12 December 2012 and the Council on 22 January 2013. As already noted, the Commission has published a proposal of directive on the FTT on 14 February 2013.

Now, Member States have to discuss the proposal within the Council. All Member States will be involved in the discussion, but, in the end, only the participants in the enhanced cooperation will vote on the proposal. Moreover, the European Parliament will also be consulted. In addition, since the proposal intends also to cover transactions taking place abroad, provided one of the parties is resident in the EU, it is very likely that some international partners of the EU will express their views and try to influence the outcome through diplomatic means.

[i] Council Decision of 22 January 2013 authorising enhanced cooperation in the area of financial transaction tax (2013/52/EU), OJ L 22, 25.01.2013

[ii] COM/2013/71.

[iii] Consolidated version of the Treaty on the European Union (TEU), OJ C 326, 26.10.2012.

[iv] Consolidated version of the Treaty on the Functioning of the European Union (TFEU), OJ C 326, 26.10.2012.

[v] See e.g. paragraph 29 of Case C-446/03, Marks & Spencer [2005] ECR I-10837.

[vi] More information and official documents on the taxation of the financial sector are available on the Commission’s website. See in particular the document COM/2013/71 of 14 February 2013.