On 8 December ,the European Commission adopted a Communication setting out possible ways of “Reinforcing sanctioning regimes in the financial services sector.” Pointing out that “The financial crisis has put into doubt whether financial market rules are always respected and applied as they should be across the Union,” the Commission has stressed that “Lack of enforcement of EU rules in one Member State may have significant implications for the stability and functioning of the financial system in another Member State.” Presently, Member States are free as regards the choice and application of national sanctions however according to the European Commission “this autonomy should be balanced with the need for effective and consistent application of European law.”

 


The Commission and the Committees of Supervisors carried out a review of member states’ sanctioning regimes for violations of national rules transposing EU directives related to financial services. They evaluated how sanctions have been applied by the Member States in the banking, insurance and securities sectors. The Commission has found that sanction regimes vary from member state to member state as well as the level of enforcement. According to the Commission the types of sanctions available as well as the level of fines vary widely across Member States. The Commission pointed out that there are significant differences as to the minimum and maximum level of pecuniary sanctions provided for in national legislations and that in some member states the maximum level is too low. Moreover, the Commission noted that member states’ competent authorities when applying sanctions do not take into account the same criteria. The Commission also found differences in the nature of sanctions provided for in national legislation as well as on the level of application of sanctions. According to the Commission there is “Divergences and weaknesses in national sanctioning regimes.”

The Commission has stressed that “Lack of enforcement of EU rules in one Member State may have significant implications for the stability and functioning of the financial system in another Member State”, consequently it believes that “further convergence and reinforcement of sanctioning regimes is necessary to prevent risk of improper functioning of financial markets.”

In the present Communication the Commission suggests therefore “possible EU actions to achieve greater convergence and efficiency” of national sanctioning regimes. The Communication has launched a public consultation, then, during 2011, the Commission will consider amending legislative acts in the financial services area such as the alternative investment fund directive, MiFID, Solvency 2, Market Abuse Directive as well as new legislative proposals in order to reinforce sanctioning regimes. Unsurprisingly, the Commission considers necessary “an EU legislative initiative to promote convergence and reinforcement of national sanctioning regimes in the financial services sector” because “these objectives cannot be sufficiently achieved by the Member States alone.

The Commission therefore suggests that “minimum common standards” could be set at EU level on “the key issues of sanctioning regimes in the financial services sector” including: the type and level of sanctions available, the availability of sanctions both against financial institutions and individuals as well as the publication of sanctions. According to the Commission this does not constitute “full harmonisation” but “greater convergence of sanctions.” However, Member States would not longer be free to regulate this area. Member States would have to respect the so-called “minimum common standards” when drafting administrative sanctions for violations of financial services rules and when applying them in this area.

Unsurprisingly, the Commission has suggested that such “minimum common standards” would be set up on the basis of Article 114 TFEU, the internal market provisions concerning the approximation of laws. The Commission has been extensively using this legal base for internal market legislation to expand EC competences to the detriment of the competences of the Member States. The Commission has justified its choice stressing that this provision “may include legislative measures relating to sanctions if they are necessary in order to ensure that EU rules are fully effective.” The measures proposed under Article 114 TFEU have to be adopted by the Council and the European Parliament (ordinary legislative procedure) with QMV required at the Council. It is impossible, therefore, to veto the proposals. Taking into account that the EU measures related to sanctions for violations of the EU financial services legislation, they would also be based on the same legal basis as the sectoral legislative acts concerned.

According to the Commission all Member States should provide for “a core set of administrative sanctions” for violations of each provision of an EU legislative instrument. Such sanctions must be “effective, proportionate and dissuasive.” The Commission is therefore planning to amend each EU financial service legislative act in order to introduce different types of administrative sanctions for each provision, in case of violation. Consequently, national legislation would have to provide for those types of sanctions, which must be imposed, against those responsible for a violation.

The Commission is considering introducing, as general obligation, the requirement for member state’s competent authorities to disclose to the public sanctions imposed.

The Commission is also planning to introduce minimum and maximum amounts of administrative fines for violations of financial services legislation.

It is also part of the Commission plans to introduce provisions stipulating that administrative sanctions “should be applicable to all the persons responsible for an Infringement”, including, therefore, the individuals responsible for a violation or a financial institution to the benefit of which the individual is acting when committing a violation.

The Commission is also planning to establish common criteria to be taken into account by national authorities when applying sanctions. The Commission will introduce provisions to the existing financial services legislation under which Member States’ competent authorities would be required to take into account the “common criteria” when determining the sanction to be imposed for a violation of financial services legislation.

Unsurprisingly, the Commission is considering introducing criminal sanctions for the most serious violations of financial services legislation. It is important to recall that under Article 83 TFEU “if the approximation of criminal laws and regulations of the Member States proves essential to ensure the effective implementation of a Union policy in an area which has been subject to harmonisation measures, directives may establish minimum rules with regard to the definition of criminal offences and sanctions in the area concerned.” This provides the legal basis for the Commission to introduce such measures. The Communication states that “the Commission will assess whether and in which areas the introduction of criminal sanctions, and the establishment of minimum rules on the definition of criminal offences and sanctions may prove to be essential in order to ensure the effective implementation of EU financial services legislation.” The procedure to adopt such measures will be the same which was followed to adopt the harmonization measures in question. This means that in the majority of the cases harmonization of criminal law will be decided by QMV through the ordinary legislative procedure (codecision procedure). It should be mentioned that the UK might not have an opt out from substantive criminal law measures as they will be adopted to ensure the implementation of another Union policy and the decision making procedure is to be found in the provisions concerning the policy in question therefore, it will be out of the Protocol on the area of freedom, security and justice.

The Commission pointed out that “The application of sanctions for violations of EU financial services legislation is mainly the responsibility of national authorities.” However, it also said "that EU can take action to improve the legal framework in which competent authorities operate, and particularly to ensure that all national authorities have the necessary key powers and investigatory tools, they cooperate and coordinate their action appropriately.” The Commission is, therefore, considering to introduce mechanisms that member states would be required to put in place to “better detect violations of EU law”, including measures intend to protect those who denounce violations. The Commission is planning to justify such interference on member states competence by saying that “such mechanisms can contribute to more effective application of EU law, to the benefit of all players in financial market.

The Commission is also considering further interfere with the member states procedural rules such as the burden of proof.