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 FTT is dying a death of a thousand cuts – this could be the final one

The EU’s Financial Transaction Tax has taken another big blow today – possibly a fatal one.

A leaked legal opinion by the European Council’s legal service has warned that the current set up of the FTT pursued by 11 member states “infringes” on and “is not compatible” with the current EU treaties (the FT’s Brussels blog has posted the full text and done a good round up of the issues at play).

The legal service was asked to look specifically into whether the FTT’s counterparty principle (taxation based on where the counterparty of the transaction is based) infringed on the right of member states which are not taking part in enhanced cooperation policy not to be affected by said policy (Article 327 TFEU).

The criticism is very much in line with complaints raised by the UK as well as by previous leaked documents (which we exclusively published) which showed growing concerns over the extraterritoriality of the FTT and that it may be discriminatory against non-participating members:

“Concerning the deemed establishment based on the counterparty principle, raises issues of extraterritorial exercise of jurisdiction, disrespect of non-participating Member States' rights under the Treaty, and compatibility with the principles of free movement of capital and non-discrimination.”

“[The counterparty principle] would constitute the exercise of jurisdiction over entities located outside the geographical area concerned by the legislation adopted under the enhanced cooperation.”

“The FTT proposed will be levied not only on risky activities but to a large extent also on activities with a genuine economic substance that are not liable to contribute to systemic risk and which are indispensable for the activities of non-financial business entities. Where activities are covered that can indeed be considered to be liable to contribute to financial markets' risk, it has not been demonstrated that the interests of Member States' are endangered to a point that the Union should divert from its attitude in principle of restraint as to extraterritorial exercise of jurisdiction.”

Those are just a few of the very clear and strongly worded arguments put forth by the legal service. Given the clarity and depth of the arguments presented it is hard not to see this as the final nail in the coffin for this (much maligned) proposal for the FTT.

Given the politics of this, there will have to be some form of 'financial transaction tax'. But, this is now likely to amount to a significantly watered down tax, possibly focused solely on equities and levied at a much lower rate only on those specifically trading the products (similar to the UK's stamp duty).

In any case, this is a big win for the UK – although how much credit it can take for it is unclear. In the end the combination of legal overstretch as well as the potential to inflict significant financial damage on fragile eurozone states has undermined the FTT. Equally this is a blow to the Commission and the European Parliament which have pushed hard and invested a lot of time resources into getting this version of the FTT through.

That said, the Commission has remained unsurprisingly steadfast, suggesting that it rejects the legal opinion and believes the current set up is compatible with the EU treaties. The German government has also suggested it will continue to pursue the FTT, but has said that it will seek to iron out all legal uncertainties first (though some in Germany have previously raised concerns about the substance of tax).

Ultimately, this may have to be decided in court. But the case for the FTT has certainly taken another hefty blow.