U.K. Loses Court Fight Over EU Powers to Ban Short-Selling

Jan 22, 2014 8:16 am ET

(Updates with EU lawmaker’s comment in third paragraph.)

Jan. 22 (Bloomberg) -- The U.K. lost its fight against European Union powers to ban short-selling, as the bloc’s top court delivered a blow to Britain’s bid to rein in EU control over financial rules.

The EU Court of Justice in Luxembourg rejected “in its entirety” Britain’s claim that emergency powers handed to the European Securities and Markets Authority were illegal and encroached on national regulators.

The decision is “excellent news for those who believe that financial markets need regulation at the EU level,” Philippe Lamberts, a Belgian lawmaker in the European Parliament’s Green group, said in an e-mail. The U.K.’s lawsuit “was clearly intended to curb the EU’s powers in that domain.”

The U.K. has repeatedly found itself on the defensive in EU financial-regulation negotiations. The nation last year opposed a deal to cap banker bonuses at twice annual salary and filed a similar challenge at the EU court on the issue. Britain has also fought plans by some nations to set up a common tax on financial transactions.

“We’ve consistently said we want tough financial regulation that works, but any powers conferred on EU agencies must be consistent with the EU treaties and ensure legal certainty,” the U.K. Treasury said in an e-mailed statement.

Prime Minister David Cameron has promised to seek a new settlement with the EU, amid rising opposition that has seen the U.K. Independence Party, which advocates a divorce from the bloc, gain in opinion polls. Cameron’s promise to hold a referendum on EU membership by the end of 2017 has failed to quell calls from members of his Conservative Party for Britain’s European destiny to be put to the people sooner.

Green Light

“This decision could give the new European Parliament and Commission the green light to confer more powers to the regulatory supervisors,” Alexandria Carr, regulatory lawyer at law firm Mayer Brown in London, said in an e-mail.

Britain contested EU rules allowing Paris-based ESMA to introduce short-selling bans to protect the “integrity of financial markets.” Under the law, ESMA can only act if a crisis has “cross-border implications” and national regulators have failed to deal with it.

The court said today that the powers granted to ESMA “are precisely delineated and amenable to judicial review” and are compatible with the EU’s treaties.

The ruling is at odds with a non-binding opinion given by one of the ECJ’s top officials last year, who supported U.K. arguments that the short-selling law was adopted using incorrect voting procedures.

Lingering Uncertainty

The ruling “removes any lingering uncertainty and is thus good news for market operators and ESMA,” Chantal Hughes, a spokeswoman for EU financial services commissioner Michel Barnier, said in an e-mail.

The U.K. had argued that the short-selling powers exceeded legal limits on agencies, such as ESMA, set up by the EU. It also said that the relevant EU law should have required a unanimous approval from EU ministers.

The decision “is significant as it both confirms the choice of a single market legal basis for such proposals and upholds the possibility to delegate intervention powers” to ESMA “under certain carefully defined exceptional circumstances,” Hughes said.

The U.K. based some of its arguments on case law, known as the Meroni doctrine, that limits the ability of EU agencies to wield discretionary powers.

Delegated Powers

“The judgment is very clear that powers can be delegated to ESMA to ensure an appropriate response to threats to financial stability and can be better done by ESMA than by national authorities,” Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels, said in an e-mail.

“Financial stability is an important argument for the court in its judgment that these powers can be exercised by ESMA,” he said.

Today’s decision is final and can’t be appealed.

The case is: C-270/12, United Kingdom of Great Britain and Northern Ireland v. Council of the European Union, European Parliament.

--With assistance from Svenja O’Donnell in London. Editors: Peter Chapman, Patrick Henry