When it rains, it pours – EU legal opinion puts UK on backfoot over revamped Liikanen rules

It’s not shaping up to be a great month for the UK government with respect to the EU – a pretty poor showing at the European elections, a looming defeat over the Spitzenkandidaten process and now, just to top it off, a troublesome legal opinion from the European Council legal service.

The FT and Reuters overnight reported on a leaked legal opinion from the European Council legal service which looks at the new rules on proprietary trading and the structural reform of the European banking sector published in January.

As a reminder, these proposals are the offspring of the Liikanen report and we covered them in detail here.

The wider political importance of these reforms relates once again to how much control the UK can retain over how to structure, regulate and, by extension, supervise its own banking sector (which, lets not forget, it continues to backstop alone) in light of further eurozone integration, which it cannot be part of. And whether the EU can be flexible enough to accommodate this.


The legal opinion, which Open Europe has seen, is a blow to the UK because it focuses on the specific article of the legislation which allows the UK and other member states which already have reforms aimed at overhauling or ring fencing their banking sector in place (such as the Vickers reforms).  The opinion notes that:

“The derogation mechanism established in Article 21 of the proposed Regulation is not compatible with the legal basis of the proposal, with the nature of the proposed instrument as defined in the TFEU and with the general institutional principles established in the Treaties.”

There are a number of justifications for this judgement given (these are the arguments of the council legal service not OE):

• Firstly, any derogation under the single market article (Art 114) should be “temporary” according to the treaty. Since the derogation seems to be permanent it falls foul of the treaty here.
• Secondly, allowing for exemptions here breaks Article 288 of the EU treaties because it stops the “general application” of a regulation across all member states. It also falls foul of the “uniform application” of regulations across member states.
• Thirdly, the legal service does not buy into the justification for the derogation, suggesting that the costs of changing legislation to meet EU rules would not be prohibitively high. This sets it apart from previous instances where objective justification has been given. Furthermore, the use of the derogation is reliant on member states making an application and does not rely solely on the Commission.
• Fourthly, the derogation only applies to countries where similar legislation has been passed before 29/01/14 – the opinion stresses that no justification is given for such a date and calls for more explanation. This cut-off date also means the exemption applies differently to certain countries which happen to already have passed their own legislation. On top of this, it only applies to certain credit institutions.
• Finally, since the exemption essentially allows national law to take precedence, it questions the primacy of EU law.

The legal services suggest a number of remedies including: allowing the derogation for a specific temporary time period, clearer justification for the cut-off date, adopting the legislation as a directive rather than regulation (allowing for greater national flexibility) or dumping the derogation altogether.

As we noted previously, the target adoption date for these rules is January 2016 and there are plenty of negotiations still to come, as such this opinion, while a blow to the UK, is the not the end of the discussion by any stretch. As the remedies suggest, there are options open to the UK and others for adjusting these rules.

Furthermore, there are plenty of other controversies in the rules, such as how to properly define proprietary trading and how all the technical standards are defined. This one will run for some time still.

The EU’s zombie tax

Back in September, we wrote on this blog that the EU’s Financial Transaction Tax was “dying a death of a thousand cuts”.

However, following that opinion of the EU Council of Ministers' legal service, the European Commission has hit back with its own legal opinion. We have got our hands on the full text, which can be seen here (thanks to Italian magazine Valori for posting it on its website). 

Despite this, we stick with our statement. For all intents and purposes, the extensive FTT that was initially proposed by the Commission seems to be dead as a policy. Indeed, it remains part of a rather heated technical discussion within the EU institutions - but we have already noted the likelihood of it returning in a much watered down version to save face of those invested in the idea.

It is, therefore, a living dead policy – a 'zombie tax' if you will.

The Commission’s counter arguments are very specific to those put forward by the Council’s legal service – itself setting up an interesting head on clash between the two bodies – the main points of which are:

• The Council does not present any legal basis for its argument that the FTT breaches international law. The Commission stresses that the issue of “more relevant” right to impose taxes is not legally defined.
• The Commission essentially argues that its FTT proposal does present enough of a nexus between the state and the transactions to allow for taxation – specifically that the counterparty principle fits with international law.
• That the FTT does fit with the enhanced cooperation procedure since it does not stop non–participating member states from pursuing their own financial taxes.
• “What the Council LS perceives as discrimination is in reality nothing but a disparity between different national tax regimes.”

The first thing that is clear, is that this is beginning to become an intensely theoretical legal discussion. It remains important, but the practical and political aspects should not be forgotten.

As we highlighted along with our exclusive release of internal documents earlier this year, one of the key reasons behind the loss of enthusiasm for the FTT was the economic impact. It became clear it is not practically workable in many cases, particularly due to its impact on repo markets as well as government and corporate bond markets.

We also still strongly agree with the Council’s take. While in legal terms the impact on non-participating states can be fiddled, in real terms there will be a sizeable impact on the financial sectors of states explicitly opposed to the tax – something which remains politically explosive in terms of EU precedent.

Again, with the FTT now slowly ambling along in zombie mode we’re sure this is not the last we have heard of it.