The European System of Financial Supervision (EBA, ESMA, and EIOPA as regulatory agencies (the ESAs) and the ESRB responsible for macroprudential oversight) has been established in response to the economic and financial crisis. For the purpose of financial market supervision, the agencies may issue guidelines and recommendations addressed, inter alia, to the competent national authorities. The founding regulations have installed a so-called “comply or explain” mechanism: The national authorities shall make every effort to comply with those guidelines and recommendations or, in the event that they do not (intend to) comply, shall inform the supervisory authority of the reasons. The European agencies make public which national authority does not comply with the guidelines and recommendations. Thus, the non-binding soft law may not be so “non-binding” after all, but instead nudge the national authorities towards compliance. In behavioural science, nudging is a means for influencing behaviour in a (from the point of view of the regulator) preferential direction. Nudging relies on three basic requirements: it must be transparent, it must be voluntary, and the preferred results must be reasonable for the public good. Nevertheless, the preferred default option is and may be encouraged by discouraging other options. Are the instruments adopted by the EBA in the form of guidelines and recommendations completely voluntary though?
1. Regulatory Activity and the Comply-or-Explain Mechanism
The agencies have identical institutional set-ups which comprises, inter alia, a Board of Supervisors (Article 6(1) of the EBA Regulation), composed of the Chairperson and (non-voting) representatives from the Commission and the other supervisory authorities and the ESRB as well as of the heads of the national competent authorities (Article 40 of the EBA Regulation). The agency – in the form of the Board of Supervisors – shall be responsible to establish consistent, efficient and effective supervisory practices and to ensure the common, uniform and consistent application of Union law. To this end, the agency can issue guidelines and recommendations addressed to the competent national authorities (or to financial institutions). The guidelines and recommendations cover a plethora of supervisory issues. As a default voting rule, the Board of Supervisors decides by simple majority of its members (Article 44(1)(1) of the EBA Regulation) or by qualified majority. Thus, even though the national authorities are involved, they can be outvoted.
Article 16(3) of the EBA Regulation sets out that the competent national authorities shall make every effort to comply with those guidelines and recommendations. Within a timeframe of two months, the national authorities shall confirm whether they comply or intend to comply with the guideline or recommendation or not. In the latter case, the national authority shall state its reasons for not complying. EBA guidelines and recommendations as soft law measures can thus produce a certain “expectation of compliance” and bindingness in the sense that States must give reasons for deviating from its provisions. In other words, national authorities may be obliged to follow soft law instruments absent better reasons; non-consideration is not allowed. The comply-or-explain mechanism enhances the bindingness of the soft law instruments.
The “comply or explain” mechanism gives the formally non-binding guidelines and recommendations the presumption of correctness and exerts a sort of pressure on the national authorities to align themselves with these instruments. Even though there are no formal sanctions for non-compliance, the naming (and shaming) of the competent national authorities by the European agency may give rise to informal sanctioning.
The lack of formal bindingness is not equivalent to legal irrelevance. As the ECJ has ruled, national courts must take recommendations into consideration to decide disputes submitted to them, in particular where they cast light on the interpretation of national measures adopted to implement them or where they are designed to supplement binding provisions of Union law (see Grimaldi and Balgarska Narodna Banka). This obligation also extends to national administrations (DHL Express (Italy)).
As regards the European agencies themselves, the issuing of guidelines and recommendations establishes a sort of administrative self-restraint as it lays down how the agency will act and apply the law (self-bindingness). Article 17 of the EBA Regulation allows the authority to take individual decisions in the national authority’s stead if the latter fails to comply with its obligations. In this situation, the European agency will likely apply the guidelines and recommendations it has adopted. Even more so, the agency must comply with the rules which it itself has adopted and this may even apply in cases where the national authority has decided not to apply the EBA’s soft law instruments.
2. Agencies’ Law-Making and The Meroni Doctrine
This rule-making of European agencies may run counter to the notorious Meroni case law (Meroni I, Meroni II, Romano, ESMA (short selling)). In these judgments, the ECJ set limits to the delegation of discretionary decision-making powers to Union bodies that are not listed as (decision-making) institutions in primary law. In order to take account this line of case law, the legislator has installed a system of cooperation between the Agency and the Commission for the adoption of delegated and implementing acts in the sense of Articles 290 and 291 TFEU, which the EBA Regulation labels as “regulatory” (Article 10) and “implementing technical standards” (Article 15). The drafts for these standards are drawn up by the EBA and sent to the Commission for endorsement. Only in exceptional circumstances can the Commission deviate from a draft, let alone adopt technical standards autonomously. Apart from this, whereas technical standards need a specific legal basis, guidelines and recommendations can be issued in virtually any field of the EBAs competence. They do not need a specific mandate or a prior approval by any other institution. Technically speaking, guidelines and recommendation do not even need to be justified under Article 296(2) TFEU as they are – formally – no “legal acts”.
This system, however, disregards the legal effects that the agencies’ soft law measures can produce. Guidelines and recommendations adopted by the EBA or any other regulatory agency can transfer political decisions to the level of national execution of the law or to bodies of supranational decision-making with a certain degree of “regulatory capture”, but without the necessary legitimation. It has even been observed that due to their flexibility, the purported soft law instruments steadily outgrow their original purpose: at times, they lay down rules that are either not implied in the framework directives or go far beyond a simple interpretation of existing law. “Guidelines” can thus become actual “rules”.
3. What to make of the Agencies soft law powers and the Meroni doctrine?
To summarise: The ESAs adopt guidelines and recommendations to supplement the supervisory framework as they seem fit. These formally non-binding soft law instruments can have significant legal effects, inter alia on national supervisory authorities through the comply-or-explain mechanism. The Meroni case-law, on the other hand, prohibits agencies from taking discretionary decisions.
Agencies, in fact, serve a valuable function in that they provide specialised scientific and technical knowledge to European institutions and national regulators in regulatory networks such as financial market supervision. Moreover, soft law measures can be an important means to take account of the principle of subsidiarity. National agencies can choose from this guidance what and how to implement specific elements in the domestic legal order in compliance with national legal requirements.
As a matter of fact, the specialised expertise of the ESAs and the information asymmetries on the part of the Commission are an important practical argument for the institutions – especially the Commission – to follow drafts and recommendations issued by agencies for the adoption of binding law. This is why the legislator established a system in which the Commission’s compliance with the agencies’ drafts is the default option. And, of course, to comply with the Meroni requirements. However, it may be problematic if in fact the Commission merely rubber-stamps the drafts when it takes the subsequent binding decision.
This leads to two possible consequences: either the comply-or-explain mechanism and its hardening of soft law are incompatible with primary law, or Meroni needs a serious update. As mentioned earlier, agencies fulfil a vital role in the Union’s administration. Moreover, they are recognised in the Union’s institutional system and are generally subject to judicial oversight by the CJEU. In my view, it is time that the treaty makers and the legislator stop fig leaving this status.
Increasing soft law powers escape a formalistic approach of dichotomy between binding acts subject to the Meroni doctrine and non-binding acts such as recommendations and guidelines. Useful and reasonable though it may be, the comply-or-explain mechanism is just a new level of soft law governance in regulatory networks that requires a renewed understanding of Union acts and the legal effects they produce, including their subsequent judicial review. The application of the Meroni doctrine to bodies and agencies of the Union no longer seems necessary under the existing Treaties, so that a delegation of discretionary decisions with a more or less wide margin of appreciation is probably permissible today. Finally, one should be honest about regulatory mechanisms and upgrade agencies’ soft law instruments to clear, binding legal acts in cases where their bindingness is indeed intended. This would do away with unclear legal obligations stemming from the comply-or-explain mechanism.
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Posted by Dr. iur. Robert Böttner, LL.M., assistant professor at the Faculty of Law, Economics and Social Sciences at the University of Erfurt, Germany. This blog piece is based on a chapter of the same title published in The Legal Effects of EU Soft Law – Theory, Language and Sectoral Insights, edited by Petra Lea Láncos, Napoleon Xanthoulis, and Luis Arroyo Jiménez (Edward Elgar 2023) p. 176.
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Suggested citation: Robert Böttner, “The comply-or-explain mechanism in the European Supervisory Authorities, or: Does Meroni allow nudging?”, REALaw.blog, available at https://realaw.blog/?p=2895
