I. INTRODUCTION
Due to the financial crisis of 2008 and the subsequent euro crisis, the global financial system almost imploded, primarily hitting banks and other US and European financial institutions. The indirect effects were immense: some European countries were close to economic collapse. To this day, for example, the extent of the problem is still evident in the difficult economic situation in Greece.
These events no longer left any doubt that the financial market supervisory structure in the European Union (‘EU’) needed strengthening, and in some respects even rebuilding. At the global level, it became clear that a more holistic approach was needed.Footnote 1 The same was true for the EU's financial services sector. Member States and institutions therefore agreed on a unified system. The overall objective was to identify risks to the stability of the financial system and establish an effective warning system. This new structure was also necessary to achieve the goal of a stable and unified financial services market. The European and national supervisory authorities now share responsibility and strengthen each other within a European operational network.
The EU's internal market for financial services is not an island. On the one hand it must, naturally, be seen as an important part of the global financial system. On the other hand, in Europe, it already has many links and interactions with the financial markets of non-EU countries, particularly the States of the European Free Trade Association (‘EFTA’).Footnote 2 For access for non-EU countries to the internal market, the EU normally establishes rules that apply to those third countries, such as Switzerland. Unlike Switzerland, however, the three other EFTA countries, Iceland, Liechtenstein, and Norway, belong to the European Economic Area (‘EEA’). Its regulatory area is essentially the same as the EU's single market. Because the three EEA EFTA States are part of the internal market, they must also incorporate and apply European legislation in the area of financial services. Consequently, they are not considered third countries in this context.
As the United Kingdom (‘UK’) has left the EU, it will now be considered a third country. The financial services market is, however, of a certain importance to both the UK, particularly the city of London, and the EU. The question will thus be in what form the UK could relate to the EU's internal market for financial services in the future. This again will depend on the form and content of a future agreement between the UK and the EU. Even though the draft Political Declaration (‘PD’) to the Withdrawal Agreement (‘WA’) assumes that a future agreement would be an association agreement, this does not say much about the level of cooperation the EU would be willing to enter into post-Brexit.Footnote 3 In order to demonstrate this, this article will show what kind of association agreement allows for which form of access or even participation in the EU's internal market for financial services.Footnote 4
Judging by the outcome of the negotiations so far, trying to predict what a new relationship between the UK and the EU could look like would mean putting oneself in the position of the Oracle of Delphi. However, experience shows that the EU is acting very much in the mindset of path dependency,Footnote 5 ie, it will start from known types and examples and certainly not invent a new model from scratch. The EU's chief negotiator has already indicated as much.Footnote 6 That is not to say, however, that the end result might not be something new altogether, but the essence remains that the starting point of negotiations on a new agreement between the EU and the UK will most likely be something that already exists. And the principles at the very structure of such a model will also be contained in the new agreement.
The two examples that seem best suited to serve as a model are the EU's agreements with the EFTA States, where Iceland, Liechtenstein, and Norway are linked to the EU through the Agreement on the European Economic Area (‘EEA Agreement’), and Switzerland is linked to the EU through a set of sectoral (bilateral) agreements (‘BAs’). These are the closest one can get to participating—entirely or partially—in the EU's internal market. No other models grant participation in the internal market, at least not in a way that would, in theory, allow for participation in the internal market for financial services. To cut a long story short: currently only the EEA EFTA States enjoy participation in the internal market for financial services with advantages such as homeland control and single licence (‘passporting’). Switzerland has no agreement on financial services and is therefore treated as a third country in this respect.
Third countries are dependent on the goodwill of the EU granting equivalence to those countries’ players and thus access to the EU's internal market for financial services. Recent developments, however, suggest that the EU's stance with regard to granting equivalence to third countries’ financial service actors is hardening.Footnote 7 On 29 July 2019, along with a new communication on equivalence in the area of financial services, the European Commission repealed, for the first time, existing equivalence decisions in the field of credit rating agencies for Argentina,Footnote 8 Australia,Footnote 9 Brazil,Footnote 10 Canada,Footnote 11 and Singapore.Footnote 12 Already on 30 June 2019 it had not extended the equivalence decision to the Swiss Stock Exchange.Footnote 13 This, however, needs to be seen in the context of a lack of progress in the EU's view regarding negotiations between the EU and Switzerland on a new Institutional Framework Agreement (‘IFA’). But it also shows that the EU does not take its decisions based on the merits of equivalence alone; it may also have political reasons.
This article briefly introduces the new financial services supervisory structure of the EU [Part II]. It then sets out the mechanisms by which the EEA EFTA States have ensured their participation in the internal market for financial services through the adoption of legislation on the European Supervisory Authorities (‘ESAs’). It also addresses the considerable difficulties that arose due to the specificities of EEA law, especially its two-pillar system. This created additional problems, in particular for the two Nordic EEA EFTA States with their dualistic concept of international law [Part III]. However, as far as participation in the internal market is concerned, this article must limit itself to the supervisory aspects. It will only touch on specific issues concerning financial instruments in the internal market, as for example in the Markets in Financial Instruments Directive and Regulations (‘MiFID’/‘MiFIR’).Footnote 14 A short chapter will follow on the continuous challenges to the smooth incorporation of financial services (supervisory) acquis originating from the particular structure of the EEA [Part IV]. Other problems will also be addressed in the specific chapters. Finally, the position of third countries such as Switzerland (and potentially the UK) in this internal market for financial services shall be briefly considered, especially with regard to supervisory structures [Part V].
Looking at national implementation would go beyond the scope of this article. If need be, reference will be made to existing literature.Footnote 15 This article can only be an interim report as the EU regulatory framework for financial services is evolving continuously.Footnote 16 There will be some mention of the kind of agreement that the UK might conclude with the EU, but this is not central to the article and is speculative at the time of writing.
II. RESCUING THE WORLD: NEW FINANCIAL MARKET SUPERVISORY STRUCTURE IN THE EU
A. Overview
Lessons from the crisis led to a new EU financial regulatory framework ‘including the highly prescriptive single rulebook, the European Supervisory Authorities (ESAs)’.Footnote 17 These concrete measures were the result of a long process initiated by the European Council's approval of the report of the expert group chaired by Alexandre Lamfalussy by its Decision of 23 March 2001.Footnote 18
The so-called ‘Lamfalussy Report’ recommended the adoption of a new approach to improve the regulatory process in financial services in order to make it quicker and more effective. In particular, this regulatory approach involves four institutional levels:
At level 1, the European Parliament and Council adopt the basic laws proposed by the Commission, in the traditional co-decision procedure. As this procedure is usually complex and time consuming, the Lamfalussy Report recommends using it only for setting out framework principles.
At level 2, the Commission can adopt, adapt, and update technical implementing measures with the help of consultative bodies composed mainly of EU country representatives. This allows the Council and Parliament to focus on the key political decisions, while technical implementing details can be worked out afterwards by the Commission.
At level 3, committees of national supervisors are responsible for advising the Commission in the adoption of level 1 and 2 acts, and for issuing guidelines on the implementation of the rules.
At level 4, the Lamfalussy Report advocates a stronger role for the Commission in ensuring the correct enforcement of EU rules by national governments.Footnote 19
The European Systemic Risk Board (‘ESRB’) is responsible for monitoring and analysing the risks that macroeconomic development and the financial system as a whole pose to the stability of the financial system (‘macro-prudential supervision’). To this end, the ESRB warns early in the event of increased systemic risk and, where appropriate, makes recommendations for actions to address these risks.Footnote 20
The new European regulators work closely together and interact with national regulators. It is their task to ensure the financial soundness of the financial institutions and to protect the users of financial services (‘micro-prudential supervision’). Currently there are three such authorities: the European Banking Authority (‘EBA’), the European Insurance and Occupational Pensions Authority (‘EIOPA’), and the European Securities and Markets Authority (‘ESMA’).Footnote 21 These ESAs must ensure the smooth functioning and integrity of financial markets and the stability of the financial system in the EU. To this end, they are to monitor and evaluate market developments. In addition, they are responsible for identifying trends, potential risks, and vulnerabilities that arise at micro-prudential level.
The new European network combines the supervision of companies at national level with close coordination at European level to promote harmonisation of legislation and consistency in the supervision and enforcement of rules. In addition, mechanisms such as joint committees are set up between European and national authorities so that national supervisory authorities can agree, for example, on cross-border institutions.
This network is constantly evolving in order to address new challenges and threats to the financial system. On 21 March 2019, the European Parliament and EU Member States agreed on the core elements of reforming European supervision in the area of EU financial markets. On 18 December 2019, the European Parliament and the Council adopted Regulation (EU) 2019/2175,Footnote 22 which reviews the powers, governance, and funding of the ESAs. Furthermore, they adopted Directive (EU) 2019/2177,Footnote 23 which amends the Solvency II Directive, the MiFID II Directive, and the Fourth Anti-Money Laundering Directive. The Regulation gives new powers to the EIOPA, EBA, and ESMA. With regard to the latter, ESMA will, for example, be given ‘direct supervisory and enforcement competences over third-country central clearing counterparties’.Footnote 24 Further details of these most recent amendments cannot, however, be reflected upon herein. As the focus of this article lies in showing how structures of EU law are transposed into EEA law, the state of implementation needs to be the same. It would therefore only create confusion if the change of law that is—at the time of writing—just about to happen at EU level is referred to, while this change will still take some time to happen at EEA level.
The article will instead limit itself to the micro-prudential level, taking the example of ESMA.Footnote 25 There are three reasons for this: First, ESMA covers the broadest and most heterogeneous market, while banking and insurance supervision are much more specific. Second, the authority subject to this regulation has the broadest and most varied competences, in particular compared to those of the EBA or EIOPA.Footnote 26 Third, the Regulations on the three supervisory authorities are very alike in structure. And ESMA also exercises a, if not the, ‘decisive technocratic influence on the governance of EU financial services market’.Footnote 27 This influence is, according to Moloney, so important, that ‘[i]t is not an exaggeration to suggest that EU financial market regulation can be divided into the pre- and post-ESMA periods, such is the scale of the influence it has come to exert in a relatively short time’.Footnote 28
A few words need to be added with regard to the institutional qualification of these ESAs. Although they act in a very specific area and are generally referred to as supervisory authorities (authorités de surveillance, Überwachungsbehörden), from an EU law point of view these are to be classified as decentralised agencies.Footnote 29 Among others, this raises questions with regard to the delegation of powers in light of the Meroni doctrineFootnote 30 of the Court of Justice of the European Union (‘CJEU’), which in principle limits the discretionary powers of EU agencies.Footnote 31 Here is not the place to go into this question in detail, but this classification of the ESAs should be borne in mind when looking at their incorporation into the institutional structure of the EEA and examining the participation of the EEA EFTA States in them (below).
B. Scope
The extent of the scope of application of ESMA is shown by the legal acts within its competence.Footnote 32 The list is constantly being extended by ‘any further legally binding Union act which confers tasks on the Authority’.Footnote 33
In addition, ESMA may also be active in issues regarding financial market participants in matters not directly covered by the legal acts mentioned before. These are matters such as corporate oversight, auditing, and financial reporting, as far as appropriate measures are required for the consistent and effective application of the legal acts by ESMA. ESMA also takes appropriate action in respect of takeover bids, clearing and settlement systems, as well as derivatives.Footnote 34
C. Competences
ESMA has the powerFootnote 35 to:
– temporarily prohibit or restrict certain financial activities that jeopardise the smooth functioning and integrity of financial markets or the stability of all or parts of the EU financial system;Footnote 36
– take individual decisions addressed to financial institutions which require measures to comply with their obligations under EU law, if the competent national authority has not applied the relevant actsFootnote 37 or has done so in a manner that seems contrary to EU law and the relevant legislation directly applicable to financial institutions;Footnote 38
– take individual decisions in emergency situations, which will prompt the competent authorities to take the necessary measures in accordance with the relevant legislation;
– take individual decisions with regard to financial institutions that need certain measures to be taken in order to be able to fulfil their obligations, if the competent authority does not apply the relevant legal acts;Footnote 39
– resolve, as a last resort, disputes between competent authorities in cross-border situations by taking decisions having an impact on the competent authorities concerned, and by taking individual decisions addressed to financial institutions that need measures to comply with their obligations under EU law, if the competent (national) authority does not comply with the decision of ESMA.Footnote 40
D. Decision-Making Procedures
Before adopting decisions provided for in the ESMA Regulation, ESMA must inform each recipient of its intention.Footnote 41 It also has to inform the addressee of the delay within which they are entitled to comment. In doing so, the urgency, complexity, and possible consequences have to be taken into account. This applies accordingly to recommendations regarding measures to be taken to comply with EU law.Footnote 42
Of course, the decision must state the reasons on which it is based and contain information on the available legal remedies. If ESMA has made an urgent decision, it will review its decision at appropriate intervals.Footnote 43
Any decision of ESMA relating to a breach of EU law or a measure in an emergency situation or in the case of a dispute between competent authorities in cross-border situationsFootnote 44 shall be published.
E. Appeal
Any natural or legal person, including the competent authorities, may appeal against a decision of ESMA within two months of the date of notification of the decision.Footnote 45
The Board of Appeal decides on the appeal within two months of the complaint being lodged. This appeal has no suspensive effect. However, the Board of Appeal may suspend application of the contested decision. Decisions of the Board of Appeal shall state their reasoning and shall also be published by ESMA.
F. Actions before the CJEU
Decisions of the Board of Appeal or, in cases where there is no right to bring an appeal before the Board of Appeal, ESMA's decisions, may be brought before the CJEU under Article 263 of the Treaty on the Functioning of the European Union (‘TFEU’).Footnote 46
ESMA must take the necessary measures to comply with the judgment of the CJEU. Otherwise, the parties concerned are entitled to lodge an action for failure to act with the CJEU pursuant to Article 265 TFEU.Footnote 47
III. INCORPORATION INTO THE EEA AGREEMENT: SQUARE PEGS …
A. The Framework of the EEA
In 1992, the EU and EFTA States signed the EEA Agreement, establishing a homogeneous European Economic Area.Footnote 48 The Agreement includes, among other things, the freedom to provide financial services in the internal market. Internal market participation also implies (‘dynamic’) incorporation of new legal acts relating to the internal market, similar to that in the EU Member States. In this respect Iceland, Liechtenstein, and Norway are not to be seen as ‘third countries’.Footnote 49
As already mentioned, the ESAs play a key role in the new supervisory architecture introduced in 2011 as part of a global reform in response to the financial crisis. The ESAs are obviously important to the EEA as well, as they are a typical instrument for the completion of the internal market. Therefore, the acts establishing these authorities also needed to be incorporated into the EEA Agreement in order for them to apply to the three EEA EFTA States.
However, the simple incorporation of these acts was hampered by certain specific features of the EEA Agreement. The EFTA States did not want to submit to supranational institutions. In addition, the Nordic countries, with their dualistic constitutional system regarding the incorporation of international law,Footnote 50 refused to accept the concepts of ‘direct effect’ and ‘primacy’ of EEA law.Footnote 51 Conversely, the CJEU had rejected the common court for all EEA countries as foreseen in the first draft of the EEA Agreement, since in its view this would have jeopardised the decision-making autonomy of the EU.Footnote 52 The EEA Agreement is therefore based on a two-pillar structure. Its two pillars are the EU institutions on the one side and the EFTA bodies on the other.Footnote 53 Legislative acts adopted by the EU institutions (regulations, directives) must be incorporated into the EEA Agreement so that they are legally binding on all parties. This aims at ensuring a uniform level of application throughout the EEA. The EEA Joint Committee, composed of representatives of the EU (European External Action Service (‘EEAS’)) and the three EEA EFTA States, shall decide by consensus on the adoption of those acts.Footnote 54
Whenever an EEA-relevant legal act is amended or a new one adopted by the EU, corresponding amendments should be made to the relevant annex to the EEA Agreement. This is essential for maintaining the principle of homogeneity of the EEA. Amendments to the EEA Agreement should ensure that the ensuing text is as close as possible to the adopted legislation on the EU side, with a view to permitting simultaneous application in the EU and in the EEA EFTA States. The EEA EFTA States can negotiate adaptations to EU legislation when this is called for by special circumstances and agreed by both sides.Footnote 55
The homogeneity principle is a—if not the—key principle of the EEA Agreement.Footnote 56 Two of the major aspects of homogeneity are legislative and judicial (procedural) homogeneity. Legislative homogeneity essentially deals with all aspects related to the incorporation of EU legal acts into the EEA Agreement. Here, the focus is on substantially identical acquis in the EU's internal market and in the EEA. However, as ‘homogeneous’ does not mean ‘the same’, there is room for deviation according to differences, for instance, in the scope of the EEA Agreement compared to the EU's internal market legislation. Further to the two aforementioned elements, there is a temporal element. In order to guarantee the legal security and the homogeneity of the EEA, the EEA Joint Committee shall take a decision concerning the amendment of an annex to the EEA Agreement as closely as possible to the adoption by the EU of the corresponding new legislation, with a view to permitting simultaneous application of the latter and the amendment of the annex to the Agreement.Footnote 57
Complying with this provision has become more difficult in recent years for different reasons. Among others, there have been an increasing number of EU legal acts containing sections that are not covered by the scope of the EEA Agreement. The number of agencies has also risen considerably, creating problems for the three EEA EFTA States, as agencies are not foreseen in the EEA Agreement and a solution for their participation needs to be found each time. Furthermore, the EU has shifted to making increasing use of regulations in its legislative activity. These ‘shall as such be made part of the internal legal order of the Contracting Parties’.Footnote 58 Because they do not ‘leave to the authorities of the Contracting Parties the choice of form and method of implementation’, the EU Member States, and afterwards in the EEA decision-taking process the EEA EFTA States, are granted less time for incorporation and, in the case of Iceland and Norway, transposition into national law.Footnote 59
Judicial homogeneity means that interpretation by judicial bodies needs to be as closely aligned as possible (see above), but again, this does not mean that there is no possibility to deviate from existing jurisprudence if the scope and aim of the EU's primary legislation and the EEA Agreement deviate accordingly.Footnote 60 For example, while the EU's internal market is a customs union, the EEA, otherwise largely matching the internal market, is not.
B. Incorporation of the New Supervisory Architecture into the EEA Agreement
1. Conflicting concepts
For the EEA EFTA States, the ‘dynamic’ development of substantive law through regular adoption of internal market-relevant EU law is in principle a matter of normality.Footnote 61 However, with regard to developing the EEA's institutional setup the situation is different. A dynamic amendment of the main body of the EEA Agreement, for example following EU Treaty changes, is actually not provided for in the EEA Agreement. Therefore, it largely reflects the situation of EU primary law at the beginning of the 1990s. With the exception of the common bodies such as the EEA Joint Committee acting merely as ‘connection points’, the EEA institutions are either EU or EFTA institutions pertaining to the respective pillars. This applies in particular if legal consequences arise for one or the other side. Thus, both supervision and jurisdiction are pillar related in that the EFTA Surveillance Authority supervises the three EEA EFTA States and intervenes in cases before the EFTA Court.
However, the new supervisory structure for the financial services sector was designed as a single structure to ensure coherent supervision with the same effect in the same market, including the three EEA EFTA States. It is thus easy to see that with the adoption of the European surveillance structure in the EEA, there was a clash of two conflicting institutional approaches. It was therefore necessary to negotiate a specific approach for the EEA EFTA States to incorporate the new surveillance structure into the EEA Agreement. This was very time consuming and did not happen without problems.
2. Practical problems during the process of incorporation
Initially, the EEA EFTA States proceeded in the usual way to prepare for the incorporation of the previously published legal acts.Footnote 62 Only during the course of the process did awareness of the various pitfalls standing in the way of incorporating the new supervisory structure develop among the negotiating partners, ie the experts of the EEA EFTA States and the European Commission or EEAS.
For the reasons described above, the EEA EFTA States focused on the incorporation of the ESMA Regulation.Footnote 63 During the process of incorporating this regulation into the EEA Agreement, Iceland and Norway indicated that several articles of the ESMA Regulation raised constitutional problems. The first problem was that the ESAs are institutions of a ‘supranational’ nature and are given decision-making powers that can directly affect the competent (national) authorities and financial institutions or market participants. This was a problem from both an Icelandic and Norwegian point of view. Although the EEA EFTA States would have a seat in the ESAs, they would not have the right to vote.Footnote 64 This corresponds to the known formula for the participation of the EEA EFTA States in EU agencies, whose activities also extend to the EEA, and which consequently also apply to these three States: ‘full participation without voting right’. The right to vote is hardly relevant in practice, but the EU formally draws the line with regard to associated countries’ rights to participate in the single market where voting rights are concerned.Footnote 65 Beyond that point, EU decision-making autonomy would no longer be guaranteed. Conversely, from the point of view of the Icelandic and Norwegian Constitutions, these bodies are supranational or ‘foreign’ institutions. However, without a legal basis at constitutional level, no such intrusive decision-making competences can be granted if directly affecting national actors.Footnote 66
A second problem arose from a temporal point of view. The transposition of EU law into the EEA should normally be carried out ‘as closely as possible to the adoption by the Community of the corresponding new Community legislation with a view to permitting a simultaneous application …’.Footnote 67 In this particular case, not only the rules governing the ESAs needed to be incorporated into the EEA Agreement, but also the entire financial services acquis, whether it be new legislation or old acts adapted to the new supervisory structure. Although the adoption of ‘normal’ (sectoral) legislation had not changed methodologically, a considerable backlog of acts to be incorporated or adapted had accumulated. The reason for this was the delay in incorporating the legal acts relating to the ESAs, upon which the adoption of the substantial legal acts depended. At its peak, the overall backlog included over 500 legal acts, at least half of which related to the financial services sector.Footnote 68 The more time that went by without an agreement on the institutional solution, the more EU legal acts that should apply in the EEA EFTA countries accumulated without being incorporated into the EEA Agreement. These delays in adopting the new structure therefore jeopardised the participation of the EEA EFTA States in the financial services single market as they no longer fulfilled the conditions for participating in it. And since the EEA EFTA States have to speak with one voice in the EEA, there was no possibility for one of the EEA EFTA States with fewer restrictions under its national law (as is the case for Liechtenstein) to go ahead with incorporation, having effect only for that State.Footnote 69 In short: without the incorporation of the supervisory structure, no further incorporation of the future financial services acquis could take place. This would erode homogeneity in the EEA and access to the financial services single market. In addition, unlike third countries, the EEA EFTA States do not have the option of having their financial services legislation regimes recognised as equivalent.Footnote 70
A third problem arose because the negotiating delegations of the three EEA EFTA countries insisted for a long time on national preference lists of (secondary) legal acts that should be adopted, if possible, in a first package with the incorporation of the ESAs into the EEA Agreement, or shortly thereafter. For its part, the Commission too had certain wishes as to which legal acts should be incorporated as soon as possible. For quite some time, the national representatives of Iceland, Liechtenstein, and Norway seemed to ignore the fact that many EU secondary legislation acts can only fully take effect—and thus create a homogenous financial services market within the EEA—if the corresponding implementing acts at lower level (Delegated Commission Regulations, ‘level II acts’) are incorporated at the same time.Footnote 71 The discussion of how the institutional setup should be handled took a considerable amount of time, not least because it was often the Finance Ministries who took charge and side-lined the EEA experts. The EEA EFTA States having to speak with one voice and, hence, agree on a common position first, also did not help in this situation.Footnote 72 Given the very diverse constitutional problems and interests, Iceland, Liechtenstein, and Norway took a very long time to agree, often on the lowest common denominator. A political agreement was only possible after the EU had threatened to exclude the EEA EFTA States from accessing the internal market for financial services altogether. Finally, many adaptations were made to the legal acts on the ESAs, for some acts up to 50, before these were ready for adoption by the EEA Joint Committee.Footnote 73 All of this led to an enormous backlog of legal acts linked to those on incorporating the ESAs into the EEA Agreement, which could not take effect before incorporation of the latter acts took place.
3. Solution
After some time of going back and forth between the various national and European law principles, as well as threats hither and yonder, a solution was outlined at the technical level and a political agreement was reached to incorporate the ESAs into the EEA Agreement. It was adopted on the occasion of the EU-EFTA Ecofin meeting of 14 October 2014 in the conclusions of the meeting of EU Finance and Economic Ministers and those of the EFTA countries of 14 October 2014.Footnote 74 Such conclusions are rather uncommon in this political framework. However, the flexibility of the EU and the EEA EFTA States regarding ‘formalities’ shows the importance of this step. The solution can be summarised as follows:
The EFTA States should be able to participate as far as possible in the European System of Financial Supervision. To this end, their competent authorities or supervisors shall have the same rights and obligations as the competent authorities of the Member States of the EU regarding the work of the ESRB, its Management Board and its Advisory Scientific Committee and the Advisory Technical Committee. The same applies to the EBA, EIOPA, and ESMA.
In order to ensure consistent oversight and enforcement of the financial services legislation, representatives of the EFTA Surveillance Authority and the national competent authorities of the three EEA EFTA States are members of the Supervisory Boards of the ESAs and their preparatory bodies. Regarding the form of their participation, the formula ‘full participation without voting right’Footnote 75 was used: ‘The competent authorities of the EFTA States and the EFTA Surveillance Authority shall, but for the right to vote, have the same rights and obligations as the competent authorities of EU Member States in the work of the European Supervisory Authority …’.Footnote 76 Conversely, the ESAs are entitled to participate, as far as possible, without voting rights, in the EFTA Surveillance Authority's financial services-related work and its preparatory bodies.Footnote 77
In accordance with the two-pillar structure of the EEA Agreement, the EFTA Surveillance Authority shall take the decisions addressed to the competent authorities in the EEA EFTA States or to individual operators in those States. In fulfilling these tasks, the EFTA Surveillance Authority will use technical expertise through an advisory committee.
The ESAs are authorised to carry out non-binding measures such as the adoption of recommendations and non-binding negotiations (directly) with the competent authorities of the EEA EFTA States and individual operators.
In order to ensure the integration of the ESAs’ expertise and coherence between the two pillars during the procedure, individual decisions and official opinions of the EFTA Surveillance Authority addressed to one or more competent national authorities or operators in the EEA EFTA States will be based on a draft prepared by the competent ESA.
This applies, in particular, to ESMA's direct supervision of credit rating agencies and trade repositories.Footnote 78 A similar rule applies, for example, to the intervention powers of the competent ESA, in accordance with Article 28 of the Short Selling Regulation.Footnote 79
Depending on the subject and, in particular, the institution whose decision is being challenged—the ESAs or the EFTA Surveillance Authority or one of the Boards of Appeal (only in the EU pillar) —and in accordance with the two-pillar principle, an appeal is to be addressed to either the CJEUFootnote 80 or the EFTA Court.Footnote 81
4. Formal incorporation
The formal incorporation of the ESAs Regulations and of the first package of related financial services acquis into the EEA Agreement was decided by the EEA Joint Committee in its Decision 201/2016, which entered into force on 1 October 2016.Footnote 82 Thus, the participation of the EEA EFTA States in the internal market for financial services was, in principal, secured for the future. Since then, packages of financial services-related legal acts have been adopted on an ongoing basis.
In order to regulate the procedures between the pillars and, in particular, the role of the EFTA Surveillance Authority as the financial supervisory authority for the EEA EFTA States and appeals to the EFTA Court, the EEA EFTA States also had to adopt a new Protocol 8 to the (EEA EFTA) Surveillance and Court Agreement (‘SCA’).Footnote 83
IV. ONGOING CHALLENGES: STILL NO ROUND PEGS
Earlier we described the process of—and indeed gave the article the title of—fitting the single supervisory approach into the particular setup of the EEA as putting ‘square pegs into round holes’. Others have called it ‘squaring the circle’.Footnote 84 The basic squaring of the circle (or rounding of the pegs) was, in the eyes of many commentators, achieved by the establishment of the EEA two-pillar structure.Footnote 85 It may have been cumbersome to adapt the single supervisory structure to the EEA and thus reconcile the two conflicting principles of monolithic supervision and not surrendering sovereign rights to supranational institutions, but looking at the bigger picture, this was merely continuing in the vein of the two-pillar structure and the legislative practice that had been developed with the integration of agencies into the EEA Agreement.Footnote 86
It is, however, far too early to claim that ‘all's well that ends well’. It is important to realise that the process is not over yet. Of course, the principal supervisory structure has been put in place and a lot of the subsequent legislation incorporated in the EEA Agreement. But whether it really works will only show in the long run, and will have to be assessed in the light of the homogeneity principle. As mentioned before, homogeneity is a principle of EEA law; possibly the most important.Footnote 87 It is the feature by which it should be ascertained that the three EEA EFTA States, despite their ‘constitutionally’ particular positions, maintain a legal discipline when putting in place essentially the same internal market legislation as in the EU Member States. Conversely, these three States are treated, in the areas covered by the EEA Agreement, as if they were EU Member States.Footnote 88
Homogeneity, however, is not identity. As a principle it should guarantee that legislation is as identical as possible to EU legislation, and that jurisprudence by the EFTA Court and the courts of the EFTA States follow the jurisprudence of the CJEU as closely as possible.
In the context relevant to this article, ie, financial market supervision, a unified approach is of the essence.Footnote 89 It is particularly important where quick reactions are needed, for example in cases where there is a market malfunction or a bank that is important to the financial system lacks funds, putting the economy of certain areas of the EEA at risk of crashing, with unforeseeable consequences. Therefore, another feature of homogeneity becomes very important: the temporal element. As mentioned before, a decision on amending an annex to the EEA Agreement, thereby incorporating an EU legislative act, shall be made ‘as closely as possible to the adoption by the EU of the corresponding new EU legislation with a view to permitting a simultaneous application’.Footnote 90 This means that the period between the entry into force of an EU act within the Union and subsequently within the EEA should be kept as short as possible.
Judging from general practice with regard to the incorporation of EU law into the EEA Agreement, the record over the last decade has not been very promising. Certainly, there is the fact that decisions to incorporate new EU law into the EEA Agreement can only be made once the decisions on EU law have been taken by the EU's institutions and published in the Official Journal of the European Union (‘OJ’). Furthermore, amendments, adaptations, or so-called ‘constitutional requirements’ according to Article 103 EEA that are needed for the incorporation of an EU legal act into the EEA Agreement may also lead to a certain delay.Footnote 91 However, over many years a huge ‘backlog’ built up that went far beyond what could be attributed to the natural delay for the reasons mentioned above. Just to take an example, in the period between 1994 and 2008 the average delay between the entry into force of an EU legal act and the entry into force of the corresponding EEA Joint Committee Decision (‘JCD’) incorporating it into the EEA Agreement was 623 days. If we take another example from the Annex on Environment, the delay in the same period amounted to 641 days.Footnote 92 And often the reasons are not only ‘technical’. Occasionally it can happen that an agreement to incorporate an EU legal act into the EEA Agreement is blocked by an EFTA State due to domestic politics. A notorious example is the Third Postal Directive.Footnote 93 While the Directive entered into force in the EU on 27 February 2008, it has still not been incorporated into the EEA Agreement at the time of writing. Hence, incorporation into the EEA Agreement has been outstanding for more than 12 years already. Even though the figures changed, the problem largely remained.Footnote 94 The procedures for incorporating legal acts at EFTA level were eventually modified and now seem to render somewhat better results.Footnote 95 Indeed, eg, in March 2019, 150 legal acts from the financial services acquis were incorporated into the EEA Agreement. But these procedures cannot remedy the lack of political will of a government or lengthy procedures at national level.
While the Commission still criticised the level of the backlog as being too high,Footnote 96 the EFTA States pointed to the fact that most of the backlog stemmed from the lack of incorporation of financial services legal acts.Footnote 97 That, first, was only partly true, as the problem pre-dated the new financial supervisory structure, and, second, it did not render the situation any less problematic. Third, the particular problem of the delay in incorporating the legal acts on the new financial supervisory structure, as well as the ensuing financial services legislation, was created by the EFTA States’ own doing. Examples of some of the difficulties are mentioned earlier.Footnote 98
Why should these historical difficulties matter with respect to assessing whether the financial supervisory structure incorporated in the EEA Agreement will function in the long term? As shown above, many of the problems at the source of the delays are of a structural nature. If there is a substantial delay, this leads to a lack of homogeneity between EU and EEA law. This may for instance lead to a distortion of the market, for example with regard to capital requirements, where conditions may be more advantageous for an Icelandic bank than for a Danish competitor if a capital requirements directive setting a higher threshold is not incorporated into the EEA Agreement within a reasonable timeframe. If, on the other hand, a larger group of consumers is affected by a regional financial crisis, for example due to the breakdown of a Liechtenstein or a Norwegian bank, and the national supervisor does not act, the supranational supervisor cannot intervene because the respective instruments have not yet been incorporated in the EEA Agreement. This undermines the whole purpose of setting up a unified financial supervisory structure across the EEA. Although this may currently all seem rather hypothetical, such a scenario might erode trust in the EEA EFTA States and, indeed, the functioning of the EEA as a whole.
And, finally, we need to remind ourselves that the institutional challenges attached to the problem of incorporating agencies into the EEA Agreement has not been permanently resolved. On the one hand there still is no standard approach to incorporating EU agencies into the EEA Agreement. On the other hand, the Commission's report on the operation of the financial supervisory structure contained proposals to change the setup, not least with regard to governance and voting rights.Footnote 99 This would quite certainly have caused, again, major discussions with the three EFTA States participating in the EEA, as they would have tried to safeguard their position and sovereign rights vis-à-vis the EU. However, given that not many of the Commission's proposals survived scrutiny by the Council (and the Parliament), there is hope that the incorporation of these new acts into the EEA Agreement will be smoother than the last time. Still, the basic problem of how agencies including supervisory bodies and specific legislative competences based therein are to be incorporated into the EEA Agreement remains. It will need to be addressed in a more general manner in the near future if the EEA is not to break over lack of homogeneity.
V. IMPACT ON THIRD COUNTRIES: IN OR OUT?
A. Access to or Participation in the Internal Market?
The financial services sector is one of the sectors where the delimitation between those countries that participate in the internal market and those that do not has increasingly sharpened over the recent years. Following the building of a strong market surveillance and supervisory structure, the EU also had to define access to or participation in the internal market for financial services for third countries. This separation follows the general logic of access to or participation in the entire internal market,Footnote 100 based on the distinction between ‘trade liberalisation and market integration paradigms’.Footnote 101 However, as the case of Switzerland demonstrates, this distinction has not always been straightforward in practice.Footnote 102 Still, with regard to the financial services sector, the EU, especially the Commission, has been increasingly uncompromising. This will not be without consequences in current negotiations with important neighbouring financial centres such as the UK and Switzerland.
B. The Case of Switzerland
1. Background
Having rejected accession to the EEA in 1992, Switzerland needed several years to negotiate some sectoral BAs giving it access to the EU's internal market in some areas of mutual interest.Footnote 103 A first batch of BAs included agreements on the free movement of persons, technical barriers to trade (Mutual Recognition Agreements (‘MRAs’)), public procurement markets, agriculture, land transport, civil aviation, and research. These were agreed in 1999 and entered into force in 2004. A second batch of BAs included Schengen/Dublin membership, automatic exchange of information (former taxation of savings agreement), combating fraud, processed agricultural products, environment, statistics, participation in the MEDIA programme (Creative Europe), pensions, and education. These agreements were concluded in 2004 and entered into force on different dates thereafter.
The EU, however, always saw these BAs as a transitional arrangement, ultimately to be replaced by a more comprehensive agreement, and insisted on adding an institutional framework to them. Formal negotiations began five years ago, and around the same time that the WA between the EU and the UK was published, a draft IFA between the EU and Switzerland was made available to the public.Footnote 104 Although their situations are not quite comparable in substance, reactions to the draft text, political discussions, and reactions to wishes for renegotiation by the EU have been very similar on both the British and Swiss political scenes.
The BAs between Switzerland and the EU do not yet extend to financial services. Hence, Swiss financial service providers do not yet have simplified access to the European financial services market. An attempt by a Swiss financial services company to avoid these difficulties, trying to use the free movement of capital as a basis for its activities, was blocked by the CJEU.Footnote 105
Ideas to negotiate a specific agreement on financial services between Switzerland and the EU have not led anywhere. A few years ago, the Swiss Federal Council (Government) again took steps to start negotiations. The idea would be to negotiate a conventional sectoral agreement, like those that already exist, to create a package of ‘Bilateral Agreements III’. However, there is little probability of this even being considered by the EU until an IFA has been signed.
As mentioned in the last chapter, the issue of incorporating the supervisory structure in the area of financial services is not just a sectoral takeover of substantive EU law, as is known to Switzerland in other areas. It is a matter of adopting new institutional structures, in a single market logic that is a priori not reflected by the current overall relations between Switzerland and the EU.Footnote 106
If the political process for accepting an IFA faces almost insurmountable difficulties, negotiating such an intrusive institutional structure in Switzerland need not even be considered. The institutional question was already raised some time ago with regard to a possible agreement on access to the European electricity market. The EU had offered Switzerland access to or even participation in its market, on the condition that institutional provisions for monitoring and settling disputes were included. The Swiss reaction was evasive to say the least and the matter remains unresolved to this day.Footnote 107
Given the (current) impasse where relations between Switzerland and the EU with regard to institutional rules are concerned, it is difficult to imagine that Switzerland will have direct access to the European financial services market—or even participate in it—in the near future.
2. Access for financial service providers from third countries
For the reasons stated above, only the offer made by the EU to third countries remains an option for Switzerland to access the internal market for financial services, and in order to gain access to the European financial services market, a third country must comply with the requirements of EU law.
To take an example: Switzerland is keen to reap the benefits of the MiFID II DirectiveFootnote 108 and the respective regulation for its financial service providers.Footnote 109 Stemming from a third country, these need to request access individually for each national market with the respective national supervisory or licensing authority(-ies). Following the implementation of MiFID II under conditions standardised by ESMA and the Member States, this may also require the establishment of a branch.Footnote 110 This is, however, only feasible for large banks and institutions, since only these are normally able to raise the necessary capital. Even in such a case, however, where a branch is used in an EEA State, this does not always guarantee passporting rights or an internal market licence. The relevant provisions are not referred to in the MiFID II chapter on rules for third countries.Footnote 111 According to the view advocated here, a branch having its principal place of business and effective administration in a third country must therefore be considered a ‘third-country firm’. However, if it is a legally independent subsidiary subject to the law of the EEA State concerned, it must be regarded as ‘domestic’ with respect to EEA law.Footnote 112 Only the latter can claim all the freedoms of European financial services law.
Even if a Swiss financial services company wants to operate directly from Switzerland on the European market, it has to register with ESMA. This is only possible on the condition that the Swiss surveillance regime is equivalent to that of the EU, and that a corresponding cooperation agreement exists.Footnote 113 Equivalence also refers to international principles that go beyond monitoring in the technical sense of the word. This includes Financial Action Task Force (‘FATF’) standards for money laundering and Organisation for Economic Co-operation and Development (‘OECD’) standards for the exchange of tax information.Footnote 114 It is, for example, questionable whether Switzerland is up to date in terms of customer protection.Footnote 115 This alone could be used to deny equivalence in whatever context. This conclusion is based on the Commission's own assertion that it ‘may look beyond the specific technical solutions envisaged and focus on the regulatory objectives pursued and the outcomes delivered by that framework’ when establishing whether equivalence is attained by a third country's framework.Footnote 116
3. Approaching equivalence
For some time, however, Switzerland has been preparing the ground for the necessary equivalence. It has, for example, signed an agreement on the automatic exchange of tax matters. The official press release also refers to market access.Footnote 117 Another project was the adoption of the Financial Services Act and the Financial Institutions Act. The former regulates in one and the same act the control of all financial service providers, who in some way manage assets. Both laws entered into force on 1 January 2020, along with the respective enforcement ordinances.Footnote 118 The objective is clearly to create a level playing field as, for example, no previously unmonitored financial service providers have access to the European market before that control is legally put in place. Finally, it should be noted that Switzerland's legislation on over-the-counter derivatives (‘OTCs’) and central counterparties (‘CCPs’)Footnote 119 is considered ‘equivalent to the requirements of Regulation (EU) No 648/2012’.Footnote 120 Of course, there is the question of whether the EU will reconsider its decision of equivalence regarding the regulatory framework of the Swiss Stock Exchange, which elapsed on 30 June 2019.Footnote 121 This decision is, however, to be seen above all in the political context of the discussion about the conclusion of the IFA.Footnote 122 This example shows that the Commission's discretion with regard to granting equivalence goes as far as to reassess and terminate any equivalence decision granted at any time.Footnote 123
C. Consequences of Brexit
1. State of play
‘Formal’ Brexit happened on 31 January 2020, followed by a rather short transition period of 11 months for the UK and EU to negotiate a new relationship. Currently (autumn 2020) it is not clear what the future relationship between the UK and the EU will be. It is, however, increasingly unlikely that any form of agreement within the aforementioned market integration paradigm will emerge. It can thus be said with some certainty that the UK will lose its status as a participant in the internal market for financial services. Therefore, the respective ‘passports’ of UK financial service providers will most likely no longer be valid from 1 January 2021. Indeed, the text on financial services in the Political Declaration does not allude to the kind of alignment with the internal market that would come with the respective consequences regarding supervision and, ultimately, impose the competence of the CJEU in order to interpret corresponding EU law.Footnote 124
The UK's negotiation position in general rejects the concept of association, suggesting rather some kind of comprehensive free trade agreement.Footnote 125 It is therefore opting for a trade liberalisation approach.Footnote 126 With regard to financial services, however, the positions are not that far apart.Footnote 127 It seems clear that, whatever the agreement, UK financial service providers will indeed lose their respective ‘passports’. The UK's situation may therefore eventually, with regard to access to the EU's internal market for financial services, resemble that of Switzerland.
2. Revival of equivalence in Europe outside the internal market?
Another consequence of Brexit for the remaining EU Member States is the strengthening of the EU's financial services supervisory structure.Footnote 128 When it was still a member of the EU, the UK was rather opposed to granting the ESAs too much power. This position was justified by its ‘adherence to a strict interpretation of the Meroni Footnote 129 ruling, which limits the discretionary powers of EU agencies’.Footnote 130 It held the view that supervision was a ‘prerogative of domestic supervisors’ and was, hence, not in favour of respective harmonisation.Footnote 131 It is unsurprising that proposals to strengthen the ESAs have been made by the Commission during and after Brexit without meeting notable resistance.Footnote 132
Not being an EU Member State anymore, the UK is free to pursue a policy of its own with regard to international agreements on financial services. It seems that the UK is embarking on a quest to establish equivalence agreements at international level, at least with like-minded partners. A concrete example is Switzerland. In 2019, both Governments had already concluded agreements on their trade relations from 1 January 2021 to the extent possible, given that some will depend on the outcome of the negotiations between the UK and the EU.Footnote 133 On 30 June 2020, the UK and Switzerland signed a Joint Statement between Her Majesty's Treasury and the Federal Department of Finance on deepening cooperation in financial services.Footnote 134 Their model of cooperation is based on ‘mutual recognition of each other's regulatory and supervisory regimes’.Footnote 135 The two countries not only seek to conclude an agreement; their aim as ‘the two leading financial centres in Europe’ is clearly ‘to set a precedent for international cooperation in financial services and a basis for future cooperation’.Footnote 136 By expressing their commitment to ‘deepen their cooperation in international fora’ and to ‘cooperate on both the design and implementation of robust international standards’, the UK and Switzerland seem to challenge the EU's role as standard setter with regard to governance, or at least with regard to financial services.Footnote 137
As to the question of what relationship the other three EFTA States will enter into with the UK, little can be said at this point in time. Unlike Switzerland, they will have to wait for the EU to conclude its agreements with the UK before a final agreement on financial services can be reached.
VI. CONCLUSION
As we have seen, the EU has been actively responding to the challenges of the 2008 financial crisis. Protecting a single market for financial services requires strong, consistent, and credible supervision. In addition to addressing macro-prudential issues, this objective has been achieved in particular through the establishment of the European Supervisory Authorities: EBA, ESMA, and EIOPA.
The three EEA EFTA States—Iceland, Liechtenstein, and Norway—are also involved in the internal market for financial services through the EEA Agreement; and this on an equal footing with the EU Member States. In order to maintain this favourable position, however, these three countries are obliged to adopt the relevant EU legislation.
Due to the very special institutional structure of the EEA and the constitutional requirements in the Nordic countries, in particular with regard to the transfer of national competences to the international or supranational level, a suitable solution had to be found. However, the overall objective of EU legislation to ensure a consistent approach in this area should not be jeopardised.
The EEA EFTA States and the EU have therefore reached a solution through which the EFTA Surveillance Authority will formally take decisions prepared by one of the three European Supervisory Authorities on the EU side. EEA EFTA experts are involved in these authorities, in line with their participation in the work of EU agencies. At the same time, it must be ensured that there are no differences in content with respect to their decisions. To this end, the backlog in the acquisition of substantive financial services law must be further reduced as well. This is particularly important in the very context of financial supervision as temporal homogeneity matters more than in other sectors.
Switzerland is not party to the EEA Agreement, nor does it have any sectoral (bilateral) agreements with the EU for financial services. And the free movement of capital does not entitle Swiss natural or legal persons to privileged access to the internal market for financial services. Switzerland is thus a third country within the meaning of EU law. In order to gain access to the internal market for financial services comparable to that of the other three EFTA countries, Switzerland would have to negotiate a corresponding sectoral agreement. Given the situation with regard to the various negotiations between Switzerland and the EU, in particular on the free movement of persons, participation in the electricity market, and conclusion of the IFA, it is unlikely that such an agreement on financial services will be reached in the foreseeable future. In the meantime, only third-country status and the hope that Swiss surveillance is considered equivalent remain. This comes with limitations and uncertainties.
Finally, all of this may give an idea of what obstacles the UK, now a third country, is facing when trying to negotiate its access to—or participation in, as the case may be—the EU's internal market for financial services. And if the EU's attitude so far since the referendum result of 23 June 2016 is anything to go by, it is unlikely to compromise just because the UK, especially London, is one of the world's most important trading places in financial services. Minor concessions may be envisaged, such as regarding clearing in the event of a ‘no deal’, but only as a temporary measure.Footnote 138 As if this were not difficult enough, the Commission has just decided to generally harden its stance, in particular with regard to the financial services sector.Footnote 139 Meanwhile, outside the EU, new models of shaping enhanced regulatory and supervisory cooperation seem to be developing.
