Investor protection brings State liability? Peter Paul revisited
The European Court of Justice has held that deficient prudential supervision under the Banking Directives cannot lead to State liability. Could the same conclusion be drawn for deficient supervision concerning the conduct of business of investment firms?
The general perception is that the primary goal of financial supervision is protecting the public interest. This perception also permeated the Peter Paul judgement (2004, C-222/02) of the European Court of Justice (‘ECJ’). In this case, the ECJ held that the provisions regarding prudential supervision in the Banking Directives ‘did not confer rights to depositors’, meaning that in that case the supervision by the German prudential supervisor was not carried out in the depositors’ interests. This prevented the affected depositors of a failed bank from successfully claiming damages from the State for deficient supervision by the financial supervisor of that bank. As a consequence, the national immunity the German financial supervisor enjoyed, and still enjoys, was found compatible with EU law. Could the same conclusion be drawn for conduct of business supervision under the Directives that regulate investment firms and their conduct towards investors?
The ‘conferring rights’ condition is sometimes referred to as the substantiation of the ‘relativity’ rule (relativiteitsvereiste) in State liability doctrine. It is one of the three conditions formulated by the ECJ in its well-known Francovich judgement (1991, C-6/90 and C-9/90), in which it ruled that a right to damages arises if a State organ breaches EU law which causes damage to individuals. In case of deficient supervision such infringement would consist of a breach of the financial supervisor’s obligation to adequately supervise under EU financial law. To meet the ‘conferring rights’ condition, the breached supervisory obligation would have to be intended to protect the private interests of (a certain group of) individuals. Are the conduct of business rules contained in e.g. the Markets in Financial Instruments Directive (‘MiFID’) intended to protect the interests of investors, so that supervision (also) serves the private interests of investors?
To answer this question, we should take a closer look at MiFID. MiFID is a direct result of the Commission’s Financial Services Action Plan of 1999, which serves the objective of a high level of investor protection. Illustrative are the provisions regarding the mandatory segregation of client assets by an investment firm. Firstly, recital 26 explicitly links these provisions to the aim of investor protection. This can be regarded as a first indication these norms aim to protect the interests of investors, even though it may not suffice to meet the ‘conferring rights’ condition. Secondly, the relevant provisions mention investors (again) as the group of individuals to be protected: ‘to safeguard clients’ (ownership) rights’. Another implication is the inclusion of a definition for investors in MiFID: ‘clients’. Thus, it seems that the provisions explicitly aim at protecting (the private interests of) investors. I would therefore argue that supervising and enforcing these norms not only is in the public interest, but also in the interests of individual investors.
What could be the implications of this conclusion? A critical revaluation of Peter Paul’s scope seems warranted; the Court’s judgement should not be a benchmark for all categories of financial supervision rules. Once a specific rule of financial supervision should be regarded as protecting the interests of private individuals, it would open the door to State liability of financial supervisors. Hence, national courts which decide on supervisory liability and national legislatures which tend to protect ‘their’ financial supervisory authorities with (semi-)immunities, beware.