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European Regulatory Private Law Going Global? The Case of Product Governance

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Abstract

The article claims that contract law principles are being used by transnational financial regulation to set a world-wide (proto)normative framework regulating intra-firm processes. This practice comes close to the European Regulatory Private Law (ERPL) phenomenon already employed by the EU lawmaker in quite technical fields, such as banking and financial services law. After an overview explaining what it is meant by ERPL, the article discusses the new Product Governance rules under the Market in Financial Instrument Directive II, which may be viewed as the most recent example of ERPL. The article then provides a description of the normative production of the International Organization of Securities Commissions (IOSCO), also regarding product governance rules. The result of the author’s analysis seems to suggest that IOSCO has paved the way for a European approach to product governance which, overall, is coherent with the ERPL theory.

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Notes

  1. Founding publications of the Freiburg School are: Böhm (1959); Eucken (2004); Eucken (2013); Miksch (1937). For more recent analyses: Streit (1992) and Vanberg (1998).

  2. The author would like to thank Professor Hans Micklitz for his advice on ordoliberalism.

  3. As Gerber writes: the ‘political and economic uncertainty profoundly affected the structure of German industry. As a means of reducing risks, firms turned to cooperative arrangements rather than competition’ Gerber (1994).

  4. Budzinski (2008). Budzinski highlights that ordoliberalism does not overlap with free-market liberalism (such as the Chicago approach or certain movements in the Austrian school) due to the fact that ordoliberalism’s idea that ‘economic freedom can become incrementally transformed and eventually eroded by unrestrained private action is decisive for the notion of an ordoliberalism (constitutional liberalism), i.e. the necessity of an institutional framework in order to protect competition from its self-destructing forces’, see at p 11.

  5. Gerber (1994), at pp 29–30.

  6. Ibid., at p 37.

  7. Ibid., at p 38.

  8. Budzinski (2008), at p 11.

  9. Ibid., at p 11.

  10. Gerber (1994), at p 36.

  11. Ibid., at p 36.

  12. Joerges (2016), at p 245. However, the relationship between ordoliberalism and the European economic constitution is much more complex and is discussed far more often: Joerges (2003); Joerges and Rödl (2004); Sauter (1998); Baquero Cruz (2002); Rutgers (2009). On ordoliberalism and contract law, see Somma (2006).

  13. Micklitz (2015), at p 2, mentioning Kennedy (2006).

  14. Ibid.

  15. Ibid.

  16. Ibid.

  17. Ibid.

  18. Ibid., mentioning Micklitz (2011), at p 3.

  19. The author would like to thank Dr Guido Comparato for his advice on the relationship between ordoliberalism and European regulatory private law.

  20. Micklitz et al. (2014), at p 5, as mentioned by Mak (2015).

  21. Mak (2015).

  22. Micklitz (2014).

  23. Micklitz (2009a).

  24. Comparato (2014).

  25. In the words of Professor Mak: ‘[I]nroads into party autonomy in private law can be explained, or even justified, in the light of the EU’s internal market policy’, Mak (2015), at p 4.

  26. Ibid.

  27. On the weaker consumer, ibid.

  28. Cherednychenko (2010), at p 410.

  29. Sir George Blunden (who, from 1974 to 1977, was Chairman of the Committee on Banking Regulations and Supervisory Practices, now the Basel Committee on Banking Supervision) once said: ‘The banking system of a country is central to the management and efficiency of its economy; its supervision will inevitably be a jealously guarded national prerogative. Its subordination to an international authority is a highly unlikely development, which would require a degree of political commitment which neither exists nor is conceivable in the foreseeable future.’ Bank of England Quarterly Bulletin 17/2 (1977), as reported by Schenk (2005), at p 223.

  30. Council Directive 73/183/EEC OJ L 194/1, 16.07.1973; Council Directive 77/780/EEC, OJ L 322/30, 17.12.1977; Council Directive 79/279/EEC OJ L 066, 16/03/1979.

  31. Council Directive 80/390/EEC, OJ L 100/1, 17.04.1980; Council Directive 88/627/EEC, OJ L 348/62, 17.12.1988; Council Directive 89/298/EEC, OJ L 124/8, 05.05.1989.

  32. Council Directive 89/646/EEC, OJ L 386, 30.12.89.

  33. Council Directive 85/611/EEC, OJ L 375/3, 31.12.1985.

  34. A financial service is regulated by the state where the service is provided, irrespective of whether the provider comes from that state or not.

  35. Directive 94/19/EC, OJ L 135/5, 31/05/1994; Directive 97/9/EC, OJ L 084, 26/03/1997.

  36. Council Directive 93/22/EEC, OJ L 141/27, 11.6.1993.

  37. European Commission (1999). As mentioned on the official FSAP web page, the Plan has three strategic objectives: establishing a single market in wholesale financial services, opening retail markets, and strengthening the rules on prudential supervision.

  38. This trend is also clear in other areas of EU law, which led Professor Micklitz to write: ‘The EC initiatives have in common that the European Commission intends to open up markets in order to create and enhance European-wide competition between national suppliers.’ Micklitz (2007), at p 26.

  39. Directive 2004/39/EC, OJ L 145/1, 30.4.2004.

  40. Casey and Lannoo (2009), at p 45, quoting P. Beres, Chair of the Economic and Monetary Affairs Committee, European Parliament, European Commission’s public hearing on non-equities markets transparency, 11 September 2007.

  41. Haas (2007), at p 5.

  42. Chlistalla et al. (2006), at p 2.

  43. In the words of Professor Micklitz: ‘[Protection of the private investor is] certainly not at the heart of this Directive’. Micklitz (2009b).

  44. The author would like to thank Professor Mak for her advice on the academic debate regarding the nature of MiFID.

  45. On the civil law effects of MiFID and its interpretative use, see Tison (2010), at p 17: ‘The wide consensus on the existence of civil law effects of MiFID, and in particular the body of conduct of business rules as further detailed in level 2 measures, will undoubtedly foster the creation of a European investor culture. The convergence to be achieved between supervisors at level 3 in the CESR architecture is likely to spill over to the interpretation of the conduct of business rules in the courts as well.’

  46. Cherednychenko (2009 and 2011); Mak (2009 and 2014). In the words of Cherednychenko: ‘[I]t is not excluded that in some cases, private law courts will review the behaviour of investment firms ex post on the basis of the general private law duties of care, which offer more protection to the investor than the maximum harmonization conduct of business rules contained in the MiFID. In fact, denying private law and private law courts a certain degree of autonomy from supervision standards and supervisory authorities involves risks considering that the effectiveness of the EC securities regulation still needs to be proved.’ Cherednychenko (2009), at p 945. On the Europeanisation of private law: Cherednychenko (2013).

  47. In the words of Busch (2012), at pp 395–396: ‘[T]he view that the European civil courts should not subject [MiFID conduct of business rules] to private law duties that are stricter than the MiFID duties is the better one. … MiFID qualifies as a sophisticated system with a high level of investor protection [which] provide[s] a well-developed regulatory system.’

  48. Casper and Altgen (2012); Giudici and Bet (2012).

  49. This is particularly true for Italy where the Court of Cassation held that the regulatory rules adopted by the Italian securities regulator (Commissione Nazionale per le Società e la Borsa – CONSOB) are mandatory private law rules. See Cassazione Civile, SS.UU., sentenza 19/12/2007 no 26724, Foro italiano, 2008, I, p 784ff; Cassazione Civile, SS.UU., sentenza 19/12/2007 no 26724 Giurisprudenza italiana, 2008, I, p 350ff, as reported by Busch (2012), at p 400.

  50. Mülbert makes the case for a public law binding effect on private law rules when financial services are being provided cross-border (Art. 31, freedom to provide investment services and activities) or through the establishment of a branch in a host Member State (Art. 32, establishment of a branch): ‘Articles 31 and 32 bar German courts from imposing an obligation on investment firms from other Member States – regardless of whether the firm acts cross-border or through a German branch – to furnish clients with information on specific risks associated with an individual product. German courts are only free to uphold such an obligation with respect to German investment firms if the client specifically asks for this kind of information. One may doubt, however, whether the courts really should establish different levels of investor protection depending on the home country of the investment firm.’ Mülbert (2007), at p 319.

  51. Further references on public and private in finance law: Hudson (2013); regarding differences in approach to investor protection between MiFID and the principles of general private law: Kruithof (2011).

  52. An advisory-based service is a consulting service where a provider makes decisions, explains findings and gives recommendations on the basis of the specific customer profile.

  53. Marcacci (2014–2015).

  54. Directive 2004/39/EC, OJ L 145/1, 30.4.2004.

  55. Casey and Lannoo (2009), at pp 45–57.

  56. On the ‘efficient consumer’: Micklitz (2009c), at p 422. On the ‘average consumer’: Mak (2013).

  57. Marcacci (2014–2015).

  58. Against this backdrop it is worth noting that Art. 52(2) of MiFID I offers a ‘rather cryptic provision on collective enforcement’ without giving a strong position to stakeholders, see Cafaggi and Micklitz (2007), at p 37.

  59. Cherednychenko (2010), at p 410. The US suitability rule has been directly developed by self-regulatory organisations (SROs) and operates through private enforcement mechanisms within the federal SRO institutional framework. See Karmel (2003).

  60. MiFID II is actually a package legislation made up of a Directive (MiFID II) – Directive 2014/65/EC, OJ L 173/349, 12.6.2014 – and a Regulation (MIFIR) – Regulation 600/2014/EC, OJ L 173/84, 12.6.2014.

  61. European Commission (2015), Updated rules for markets in financial instruments: MiFID 2, http://ec.europa.eu/finance/securities/isd/mifid2/index_en.htm. Accessed on 20 May 2016.

  62. Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits, OJ L 87/500, 31.3.2017.

  63. European Securities and Markets Authority (ESMA), ESMA’s Technical Advice to the Commission on MiFID II and MiFIR, ESMA 2014/1569, available at http://www.esma.europa.eu/content/Technical-Advice-Commission-MiFID-II-and-MiFIR. Accessed on 20 May 2016.

  64. Directive 2014/65/EC, OJ L 173/349, 12.6.2014.

  65. The author would like to thank Professor Calderai for her support regarding this complex issue.

  66. A very good example is the US securities laws: here the Supreme Court expanded the scope of the fiduciary duty – as developed in the US legal tradition – in its seminal 1963 Capital Gains case where it stated that the 1940 Investment Advisers Act ‘reflects a congressional recognition of the delicate fiduciary nature of an investment advisory relationship’ and reflects ‘a congressional intent to eliminate, or at least expose, all conflicts of interest which might incline an investment adviser – consciously or unconsciously– to render advice which was not disinterested’. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191 (1963). Available at: https://www.sec.gov/divisions/investment/capitalgains1963.pdf. Accessed on 7 May 2016. On this landmark case, see Laby (2011).

  67. Seipp (2011).

  68. Ibid., at p 1011.

  69. Ibid., at p 1036.

  70. Getzler (2002), as reported by Frankel (2011), at p 4. In the words of Professor Frankel: ‘[T]he main purpose of fiduciary law [is] to prohibit fiduciaries from misappropriating or misusing entrusted property or power.’ Frankel (2011), at p 108.

  71. Bachner (2009), at p 178.

  72. Ibid.

  73. Ibid.

  74. Gerner-Beuerle and Schuster (2014).

  75. Ibid., at p 196.

  76. Ibid., at p 197.

  77. Bachner (2009), at p 151. The same author suggests using a new term: ‘fiduziarische Pflicht’. Still in the context of German law, Professor Grundmann carries out an analysis of trust and Treuhand and the third-party relationship, and affirms how German law ‘suffered for so long from the lack of a broader fiduciary principle’, Grundmann (1999), at p 402.

  78. Professor Gambaro executes a seminal analysis of the trust as developed in the common law tradition over time by comparing it to the Italian discipline of ‘fiducia’. Gambaro explains how the ‘fiducia’ provides one of the two parties in a relationship (the trustee, fiduciario) with a right or a legal power that is limited by the duty take account of the interests of the other party (the settlor, fiduciante) or a third person (the beneficiary, beneficiario). This takes place within a framework called ‘fiducia romanistica’ where the fiduciante transfers the property right attached to a good to the fiduciario: the limit to the duty to consider the interests of the other party is regulated by internal agreements (rapporti obbligatori interni) between the fiduciante and the fiduciario. Gambaro (1999). On fiduciary relationships in Roman law: Johnston (1988).

  79. In the words of Professor Gambaro: ‘[I]l trust non ha succedanei competitivi nei sistemi di civil law. In generale quindi nella corsa alla costituzione di patrimoni separati con destinazione di scopo … il trust ha dimostrato di costituire una risposta più efficiente rispetto alla creazione di soggetti separati’ [‘T]he trust has no competitive substitutes in civil law systems. In general, if one wishes to establish separate ownerships of assets with a targeted purpose… the trust has proven to be a more efficient solution than the creation of separate entities’ [the author’s own translation from Italian] Gambaro (1999). Within the context of financial law, Professor Calderai, leveraging on the Italian fiducia, considers obblighi fiduciari (fiduciary duties) of investment service providers as connected to the so-called ‘best execution principle’, Calderai (2009).

  80. Loi no 2007-211 du 19 février 2007 instituant la fiducie, at https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000000821047, accessed on 20 May 2016. Art. 2011 of the French Civil Code now reads as follows: ‘The fiducie is the operation whereby one or more settlers transfer property, rights or securities/guarantees, or a set of assets, rights or securities/guarantees, present or future, to one or more fiduciaries who, by keeping them apart from their own assets, act for a specific purpose for the benefit of one or more beneficiaries’ [The author’s own translation from French].

  81. On the French fiducie: D’Auria (2012); Douglas (2013); Devaux et al. (2014); Emerich (2009); Gvelesiani (2013). Outside the Western legal traditions, the situation is not much clearer. Increasing attention is being paid to fiduciary duties in China’s codified Corporate Law: the new Arts. 148 and 149 – reformed in 2005 – introduced a common law-style classification of directors’ duties to the company (usually a state-owned enterprise) and provided more precise rules on the duty of loyalty and the duty of diligence, Xu et al. (2013). However, it is uncertain if these new Articles have actually had a concrete significant impact and, in this regard, Lee writes that ‘while it is not clear whether the intent of articles 148 and 149 of the revised Company Law is to import Anglo-American fiduciary concepts to China, it is at least arguable that those express stipulations could produce such effect. The introduction of an overarching “obligation of loyalty” in article 148(1) encompasses a concept of fiduciary loyalty of directors.’ Nevertheless, the author recognises that ‘there is no effective institutional framework to support the fiduciary system in China’, Lee (2007), at pp 908–909.

  82. Easterbrook and Fischel (1993), at p 426. In the words of the authors, ‘a “fiduciary” relation is a contractual one characterized by unusually high costs of specification and monitoring’, at p 427. And as stated by Chodos (2011), at p 838, ‘a fiduciary duty always arises by agreement. … A direct, consensual relationship must exist between the parties in order for a fiduciary duty to arise.’

  83. The ‘know your customer’ rule has traditionally been a key feature of US securities regulations and the related common law context. Recently on the development of the KYC rule: Genci (2012). In particular, the original New York Stock Exchange Rule 405 already provided that ‘every member organization is required to: … [u]se due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization’, Comment (1973), note 62.

  84. Regarding the ‘know your customer’ and ‘know your merchandise’ principles under US Law, see Lee-Hazen (2003) and Haas and Howard (2008).

  85. On the issue of the conduct of business rules as supervision standards in MiFID, see Cherednychenko (2010), at pp 403–424.

  86. Art. 13, Directive 39/2004 (MiFID I).

  87. Even though the law refers to ‘organisational or administrative arrangements’, the terminology often used by the industry is ‘management model’ since it conveys the idea of a responsibility-based cascade structure.

  88. Art. 18, Directive 39/2004 (MiFID I).

  89. Art. 22, Commission Directive 2006/73/EC, OJ L 241, 2.9.2006.

  90. Macey and O’Hara (1997), at p 188.

  91. D’Hondt and Giraud (2007), at p 18.

  92. Insurance policies, though widely sold through commercial banks’ retail networks, fall under the remit of the Insurance Mediation Directive (Directive 2002/92/EC, OJ L 9/3, 15.1.2003). Interestingly, a PG-wise approach has been taken by the European Insurance and Occupational Pensions Authority (EIOPA) (2014) in its Consultation Paper on the proposal for guidelines on product oversight & governance arrangements by insurance undertakings.

  93. Regulation 1286/2014, OJ L 352/1, 9.12.2014.

  94. Arts. 9 and 10 of Commission Delegated Directive (EU) 2017/593.

  95. Art. 9 of Commission Delegated Directive (EU) 2017/593.

  96. Ibid.

  97. The Delegated Directive provides a non-exhaustive list of negative conditions to be taken into account: ‘(a) the market environment deteriorated; (b) the manufacturer or a third party involved in manufacturing and or functioning of the financial instrument experiences financial difficulties or other counterparty risk materialises; (c) the financial instrument fails to become commercially viable; or (d) demand for the financial instrument is much higher than anticipated, putting a strain on the firm’s resources and/or on the market of the underlying instrument.’ Art. 9(10) of Commission Delegated Directive (EU) 2017/593.

  98. Art. 9 of Commission Delegated Directive (EU) 2017/593 requires that firms assess whether a financial product creates a situation where clients may be adversely affected if they take ‘(a) an exposure opposite to the one previously held by the firm itself; or (b) an exposure opposite to the one that the firm wants to hold after the sale of the product.’

  99. Ibid.

  100. Art. 10(2) of Commission Delegated Directive (EU) 2017/593.

  101. Ibid.

  102. Ibid.

  103. Art. 10(5) of Commission Delegated Directive (EU) 2017/593.

  104. Ibid.

  105. Art. 10(1) of Commission Delegated Directive (EU) 2017/593.

  106. Art. 10(2) of Commission Delegated Directive (EU) 2017/593.

  107. ESMA (2014), at p 52.

  108. Art. 10(10) of Commission Delegated Directive (EU) 2017/593.

  109. Martiniello (2015).

  110. Ibid.

  111. Arts. 9(6) and 10(8) of Commission Delegated Directive (EU) 2017/593.

  112. Arts. 9(7) and 10(6) of Commission Delegated Directive (EU) 2017/593.

  113. Arts. 9(6) and 10(8) of Commission Delegated Directive (EU) 2017/593.

  114. ESMA (2014), at pp 57-58.

  115. Ibid., at p 60.

  116. Also called the ‘Inter-American Association of Securities Commissions’ in Sommer (1996), at p 15.

  117. Bismuth (2009), at p 208.

  118. On IOSCO’s decision-making process, see Marcacci (2016).

  119. It is quite difficult to categorise ‘soft-law’ arrangements because different ‘instruments may be included within this generic term for a number of reasons: 1) they have been articulated in non-binding form according to traditional modes of law-making; 2) they contain vague and imprecise terms; 3) they emanate from bodies lacking international law-making authority; 4) they are directed at non-state actors whose practice cannot constitute customary international law; 5) they lack any corresponding theory of responsibility; 6) they are based solely upon voluntary adherence, or rely upon non-judicial means of enforcement’, Chinkin (2003), at p 30.

  120. IOSCO currently counts 124 ordinary members (usually public financial market authorities), 15 associate members (such as regulators not dealing with regulated capital markets) and 64 affiliate members (usually stock and futures exchanges or broker/dealer associations) from all over the world. See International Organization of Securities Commissions – IOSCO, About IOSCO, https://www.iosco.org/about/?subsection=about_iosco. Accessed on 29 December 2015.

  121. Brummer (2009).

  122. See International Organization of Securities Commissions–IOSCO, About IOSCO, supra n. 120.

  123. Even the ‘founding’ Ecuador Conference in 1983 did not provide IOSCO with a formal international legal status, like the one held, for instance, by the WTO. On this point: Bismuth (2009), at p 208.

  124. International Organization of Securities Commissions IOSCO, About IOSCO, supra n. 120.

  125. Ibid.

  126. The following are some relevant documents that IOSCO adopted over the last decade: IOSCO Board, Recommendations Regarding the Protection of Client Assets, January 2014; IOSCO Board, Principles for Ongoing Disclosure for Asset-Backed Securities, November 2012; IOSCO Technical Committee, Hedge Funds Oversight, June 2009; IOSCO Technical Committee, Principles for the Valuation of Hedge Fund Portfolios, November 2007; IOSCO Technical Committee, Performance Presentation Standards for Collective Investment Schemes: Best Practice Standards, May 2004; IOSCO Technical Committee, Code of Conduct Fundamentals for Credit Rating Agencies, December 2004.

  127. On this point, see Marcacci (2014).

  128. IOSCO (2003).

  129. International Organization of Securities Commissions IOSCO, About IOSCO, supra n. 120.

  130. Lucy (2003).

  131. The Principles state that the ‘three core objectives of securities regulation are: The protection of investors; Ensuring that markets are fair, efficient and transparent; The reduction of systemic risk’, IOSCO (2003), at p 5.

  132. Ibid., at p 5.

  133. Ibid., at p 5.

  134. IOSCO Executive Committee (2003), at p 3.

  135. Directive 2004/39/EC, OJ L 145/1, 30.4.2004.

  136. The report states that a ‘hedge fund must disclose adequate information about its strategy (including the risks involved) and the terms and conditions involved in investing in the fund. In addition, the investors’ interests need to be reasonably protected, for instance by risk diversification requirements’, IOSCO Executive Committee (2003), at p 6.

  137. IOSCO Board (2013a).

  138. The report defines structured products as ‘compound financial instruments that have the characteristics of combining a base instrument (such as a note, fund, deposit or insurance contract) with an embedded derivative that provides economic exposure to reference assets, indices or portfolios. In this form, they provide investors, at predetermined times, with payoffs that are linked to the performance of reference assets, indices or other economic values’, ibid., at p 7.

  139. IOSCO Board (2013b), at p 1.

  140. This is directly dealt with by Tool 2, which specifies how the ‘regulatory approach to retail structured products adopted by IOSCO members could consider evaluating the whole value-chain of the retail structured product market to address specific (or common) challenges arising at every or a specific step of the product’s life’.

  141. The term ‘manufacturer’ is to be preferred to ‘issuer’. Whereas the former is related to an investor protection dimension, the latter applies to other areas of financial services and markets law such as the ‘issuance of financial instruments in the primary markets’.

  142. IOSCO Board (2013b), at p 16.

  143. Ibid., at p 17.

  144. Ibid., at pp 19-20.

  145. Ibid., at pp 20.

  146. On pre-approval: ibid., at p 10.

  147. The ‘Suitability Requirements with Respect to the Distribution of Complex Financial Products’ report does not have binding power, but simply suggests available regulatory options.

  148. On corporate governance of banking institutions: Mülbert (2009).

  149. IOSCO Board (2013b), at p 20.

  150. Ibid., at p 14.

  151. Ibid., at p 20.

  152. Significantly, the Compliance Function is also in charge of running the internal education modules for personnel. This can be interpreted as an interiorisation of the ‘know your merchandise’ principle.

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Authors and Affiliations

  1. European University Institute Alumnus, Florence, Italy

    Antonio Marcacci

  2. Compliance Professional, Banking and Financial Industry, Milan, Italy

    Antonio Marcacci

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Correspondence to Antonio Marcacci.

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The author would like to thank Professor Hans-Wolfgang Micklitz for his precious guidance and advice, as well as Professor Valentina Calderai, Dr Guido Comparato, Professor Vanessa Mak and Dr Francesco Martiniello for their valuable comments. All mistakes are the author’s own. Furthermore, the views expressed in this article are those of the author and are not to be reported as representing the views of the author’s past and/or current employer(s).

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Marcacci, A. European Regulatory Private Law Going Global? The Case of Product Governance. Eur Bus Org Law Rev 18, 305–332 (2017). https://doi.org/10.1007/s40804-017-0068-0

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