Too-Powerful Securities Regulators Take a Hit

(CN) - EU lawmakers gave too much power to fledgling securities regulators in the wake of the 2008 worldwide financial meltdown, a high court adviser said Thursday.

Advocate General Niilo Jaaskinen's opinion comes two years after the establishment of the European Securities and Markets Authority (ESMA) in response to the deepening fiscal crisis.

EU lawmakers gave ESMA the power last year to intervene in the short-sell and hedge-fund markets of individual member states. The United Kingdom sued the European Council, arguing that ESMA's newfound control far exceeded court-established separation-of-powers limits by illegally giving the agency legislative and statutory authority - particularly in situations where the governments of member states declined to act.

In his opinion for the Luxembourg-based Court of Justice, Jaaskinen said the agency's ability to meddle in the affairs of individual governments does not pass constitutional muster though the empowerment of ESMA by lawmakers did.

"Other regulatory agencies cannot make legally binding decisions directed at individual legal entities in substitution for either a decision, or the inaction, of a competent national authority which may well disagree with a decision taken by ESMA," Jaaskinen wrote. "Yet this is precisely what the law empowers ESMA to do. It says that a measure adopted by ESMA shall prevail over any previous measure taken by a competent national authority."

While EU leaders have the power to establish super agencies like ESMA in emergency situations, the agencies' power cannot exceed what is necessary to stabilize the internal market, Jaaskinen noted. ESMA's ability to tinker in the financial markets of individual countries goes beyond market harmonization, according to the opinion.

With ESMA, EU lawmakers "create an EU level emergency decision-making mechanism that becomes operable when the relevant competent national authorities do not agree as to the course of action to be taken," Jaaskinen wrote. "Due to ESMA's voting rules, this action can be taken on the basis of a qualified majority of its board of supervisors. Hence, the outcome of the activation of ESMA's powers is not harmonization, or the adoption of uniform practice at the level of the member states, but the replacement of national decision making with EU level decision making."

The adviser acknowledged the need to regulate the short-sell market - but in concert with national authorities as required by the 2009 Lisbon Treaty, which expanded the role of member-state governments in the EU legislative process.

"In situations posing a threat to the orderly functioning and integrity of financial markets or to the stability of whole or part of the financial system in the European Union, a centralized decision making procedure enabling uniform application of EU rules on short selling would seem to be both necessary and proportionate," Jaaskinen wrote. "But a centralized emergency decision making process that replaces the decision of the competent member state authority, without its consent, or which provides a substitution for the absence of one, cannot be considered to be encompassed by the concept of 'approximation of the provisions laid down by law, regulation or administrative action in Member States' under the treaty."

Jaaskinen's opinion is not binding on the Court of Justice, which has begun its own deliberations in the case.

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