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Public and Private Regulation of Financial Markets

How should jurisdictions, both on the national and on the supra-national level, handle the interaction between public and private law where it regards the regulation of financial markets?

2017  -   2019
Matthias Haentjens


Outline of the project: practice and theory

Financial law is a functional area of law. It investigates the financial markets from a legal perspective, but this legal investigation may involve various areas of law that have traditionally been separated. Law schools, law firms as well as courts traditionally distinguish mainly between private or commercial law departments, and public law departments. Whilst this distinction may be theoretically sound in many instances, we believe a sensible investigation of the financial markets requires a more integrated approach. Moreover, recent developments in this field have increasingly called for such an approach.

First, European law is oftentimes necessarily ‘neutral’ or ‘silent’ in that European legislative instruments usually do not distinguish between public and private law. This is so because the distinction between public and private law may differ from Member State to Member State. Also, the distinction between public and private law is especially relevant where it concerns the sanctioning of (substantive) norms expressed in European law, and sanctioning is the traditional prerogative of the Member States. Therefore, European law often leaves the sanctioning - and thus whether such sanctioning is organised under private or public law – to the discretion of the Member States. For instance, Article 69(2) of the (2014 version of the) Markets in Financial Instruments Directive, says that “Member States shall ensure that mechanisms are in place to ensure that compensation may be paid or other remedial action be taken in accordance with national law for any financial loss or damage suffered as a result of an infringement of this Directive or of Regulation (EU) No 600/2014.” [emphasis added]. This provision clearly stops short of prescribing the organization of sanctioning under national law, either by means of private or public law.

The ‘neutral’ stance of the European legislature may prove to be problematic in national legal systems. For instance, in several jurisdictions such as the Netherlands, damages can be claimed in a civil court on the ground that a financial institution has breached regulatory norms of European origin that aim to protect the interests of clients of that financial institution. In those instances, civil law remedies may provide more severe sanctions than, or, conversely, provide exceptions to the European regulatory norms. Thus, these remedies would not fully accord with the European norms and the legislative instrument which contains those norms, and the civil court may experience difficulties in applying these national law remedies for fear of violating European law. In some jurisdictions such as Germany, civil courts may even refuse to involve regulatory norms of European origin, when they consider those norms to be of a public law nature. Conversely, in other jurisdictions such as the US, administrative bodies may even pursue sanctions under private law.

As was also described in our previous research programme “European Integration in Finance”, financial law in Europe is ever more intensively harmonised. Not only have many Directives been turned into Regulations, but also have European instruments been adopted in areas where there was no previous European harmonisation. Considering the neutral stance of European legislative instruments as described above, this increasing Europeanisation also means that the private – public law problems may become more acute, or, less dramatically, that the boundaries between public and private law will fade away more. This development is certainly also to be expected in the context of new European legislative initiatives such as the Capital Markets Union initiative.

Second, several recent European harmonisation instruments explicitly take an integrated approach, in which public and private law regulation are expressly combined. In 2015, for instance, the second pillar of the Banking Union was created. The main legislative instruments of this pillar, viz. the European Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Regulation (SRMR), have caused, for many European jurisdictions, a major shift in their national approach to bank insolvency. Formerly, bank insolvencies were commonly regulated under ‘normal’ national insolvency law, ie private law, whilst under the new regime created by BRRD and SRMR, bank insolvencies have been largely taken away from the bankruptcy courts and laid in the hand of so-called resolution authorities. Thus, bank insolvency law has changed colour and has become an area of public law. Nonetheless, in many respects, this new bank insolvency law regime interacts and refers to ‘normal’ national insolvency law and national bankruptcy law remains to be of relevance. Moreover, in the US, recent legislative proposals have even been brought forward to facilitate the resolution of banks under bankruptcy law, rather than under the public law regime.

Third, also on the purely national level, boundaries fade between public and private law where it concerns the financial markets. The Dutch Financial Supervision Act (FSA) for instance, is commonly understood to be a statutory instrument of public law nature, for many norms the Act contains are sanctioned by administrative bodies. However, the Act also contains several provisions that are explicitly or implicitly of a private law nature. For instance, art. 4:24a FSA contains a general duty of care for financial institutions to be sanctioned under private law. Similarly, art. 1:25d FSA limits the civil liability of the Dutch Central Bank when acting in its supervisory role. The Dutch Ministry of Finance is considering a major overhaul of the FSA and it is likely that the public – private distinction will be considered in that work.

With this new research programme, the Hazelhoff Centre for Financial Law intends to engage in the academic debate on the developments described above. It shall take an inter- and multidisciplinary, as well as a multi-jurisdictional approach (to be elaborated below), in which instances of the interaction between public and private law will be critically analysed. This analysis shall be coupled with a theoretical dimension, concentrating on the question what are and should be the drivers for regulation by either public or private law means?

The new research programme builds on our previous research programme “European Integration in Finance” that ran from 2015-2017. The current research programme is both more specific, and broader that the former one. It is more specific, as it focuses on a specific element of the Europeanization of financial law, viz. the public – private law distinction (whether non-existent or explicit) in European legislation and its consequences for the jurisdictions of the Member States. On the other hand, it is broader, as the current programme is not necessarily confined to European law. Also on the global and the purely national level, phenomena in the financial markets are increasingly approached in an integrated way that involves both public and private regulation.

Research: central question

Considering the outline just set out, the central question to which this research programme seeks answers is: how should jurisdictions, both on the national and on the supra-national level, handle the interaction between public and private law where it regards the regulation of financial markets?

Innovative approaches: inter-disciplinary, multi-disciplinary and multi-jurisdictional

This research project is innovative in several ways. First, it employs a thoroughly inter-disciplinary approach. The project investigates how jurisdictions, both on the national and the European level, should handle the interaction between public and private law where it regards the regulation of financial markets. This interaction, stated above, will mainly concern public and private law, but may impact other areas of law as well, be it criminal law, insolvency law, or European (institutional) law. To this end, the Hazelhoff Centre shall intensify its cooperation with other departments within and outside of the Law School. In Spring 2018, for instance, it intends to organise a conference on administrative law with the Leiden Law School’s Administrative Law department, together with the famous French Société de la Législation Comparée.

Furthermore, the project is multi-disciplinary. The regulation of financial law regards not only legal, but also economic and behavioural perspectives, and the project has the ambition to bring these perspectives together. For this element, the Hazelhoff Centre and its researchers work together with economists and social scientists of Leiden, Delft and Erasmus (LDE) in the context of the LDE European Research Centre for the Economic and Financial Governance (EURO-CEFG).

Also, the project is not limited to Dutch law. Its scope is extended to supra-national (European) law, as well as foreign legal systems, such as English, German and US law. The individual members of the Hazelhoff Centre have an excellent international network to realise this international aspiration, but the Centre is also institutionally placed at the core of the recently founded European Banking Institute.

Finally, as already alluded to above, the project has both a practical and a theoretical character. It critically analyses several topical developments from a common perspective, viz. the interaction between public and private law where it regards the financial markets. But as the project is mainly normative in nature (it focuses not so much on the description of current rules, but on the rules as they should best be enacted), the project is likely to result in practical advice to the national and European legislature. The Centre, for instance, plays an advisory role to the Ministry of Finance in its FSA project referred to above.

With its theoretical dimension, this project it is connected with the larger Leiden Law School research programme Coherent Private Law. Whilst this project Public and Private Regulation of Financial Markets investigates how various legal systems should best address the instances where public law influences private law and vice-versa, the larger programme Coherent Private Law zooms in on the consequences of such interaction for private law. This project also accords perfectly with the Law School’s Interaction between Legal Systems programme. Together with colleagues from the Private Law department, the Hazelhoff Centre will develop a new course Interaction between Legal Systems, in which various elements discussed above shall be included.

We believe that the approach discussed above makes this project a unique and innovative one, considering that existing other projects in this field take a more traditional one-sided perspective, viz. either from a “one jurisdiction”, from a European or strictly legal perspective.

Research results

This research project will be planned for three years. It plans to produce results in various ways, including the following:

  • two conferences, one in May 2017, and the second at the end of the project in 2019;
  • two books, e.g. in the new Hazelhoff Financial Law Series;
  • 5 contributions to (international) conferences other than the ones referred to above;
  • 5 articles in leading (international) academic journals, also to be published on SSRN in the Hazelhoff Financial Law Working Paper Series; and
  • practical advice to the national and European legislature, e.g. in the form of consultation papers, and by contributing to the legislative process as Members of Expert Groups.