Financial services and Brexit – the new UK settlement with the EU and its legal status


Key issues for the financial services sector – the Eurozone dilemma

The key issue for the City of London, and for the broader UK financial services sector, is the fear of Eurozone dominance, particularly given that Eurozone states will now command a qualified majority and therefore be able to impose EU legislation on non-Euro members (referred to as ‘Eurozone caucusing’).

Recent contentious issues (well-rehearsed in the current debate) have concerned the Eurozone’s (unsuccessful) attempt to use the European Financial Stability Mechanism (which would have involved UK contributions) to fund a Greek bail-out, the ECB’s location policy for euro clearing (successfully challenged by the UK (1)), the proposed financial transaction tax (where the UK’s challenge was found to be premature (2)), as well as (unsuccessful) UK challenges to the bonus cap (3) and ESMA’s short selling powers (4).

It has been clear for some time that the UK would not achieve fundamental reform of its relationship with the EU (5) . The new settlement reflects the negotiation on the seven demands on economic governance in David Cameron’s letter to Donald Tusk (President of the European Council) of 10th November (see our earlier report relating to the Tusk package).

The decision addresses these points in five sections (the headline for each from HMG’s 22nd February document is given as a sub-heading below) -

“Recognition that the UK should not be forced to participate in measures that are for the Eurozone” and “UK businesses trading in the single market cannot be discriminated against because the UK is outside the Eurozone”


1. This recognises the UK’s right to retain sterling. It prohibits discrimination against companies based on the currency of their Member State and provides for mutual respect between non-Euro and Euro states. Euro area measures ‘shall not constitute a barrier to or discrimination in trade between EU Member States’.

2. The Banking Union shall only apply to Euro states or those who apply to join. Recognition is given to the possibility that the single rulebook may develop with greater uniformity in the Banking Union than for those states outside (6) .

“UK taxpayers will never be required to pay for Eurozone bail outs”


3. Provides that measures to safeguard the Euro area will not involve budgetary responsibility of non-Euro states. The agreement provides for reimbursement where general EU funds are used (but this does not cover administrative costs).

“Responsibility for supervising the financial stability of the UK remains in the hands of the Bank of England”


4. The authority of each non-Euro state in preserving the financial stability of that Member State is recognised. This is intended to recognise, for example, the role of the Bank of England in this field.

“All discussions on matters that affect all member states will involve all EU Member States, including the UK”


5. The UK will not be left out of discussions which affect all Member States. The new settlement allays the fears regarding the UK’s voice in the EU: it reaffirms that all Member States have the right to participate in Council discussions even where they may not have the right to vote (e.g. where the matter is an issue affecting Eurozone countries only).

These substantive elements of the settlement relating to economic governance are to be ‘incorporated into the Treaties at the time of their next revision’.

Other issues

There are provisions on other issues; those concerning welfare and free movement have been well reported in the press and fall outside the scope of this report. HMG’s document describes the outcome on competitiveness and sovereignty as follows –

  • Regulatory burden is to be reduced – especially for small businesses – in line with specific targets in key sectors. Barriers to trade within the EU are to be tackled: particularly in the areas of services, energy and digital. Free trade agreements are to be pursued with leading economies to reduce or, where possible, eliminate, tariff and regulatory burdens faced by UK firms in non-EU markets.
  • Recognition that the UK is not committed to further EU integration. This is the second measure that would be reflected in a future Treaty change (see below).

The latter issue arises from HMG’s concern over the “ever closer union” concept – something the House of Commons Select Committee (7) thought was purely of political rather than legal significance. The outcome reinforces the existing statutory requirement in the UK’s European Union Act 2011 (which makes it impossible for HMG to cede more power to the EU without a referendum).

  • A red card system (an enhanced version of the current little used ‘yellow card’) will enable a 55% majority of national EU parliaments to lodge a reasoned objection to legislative proposals. This must be done within 12 weeks. The legislation should then only proceed if the objections are accommodated in a revised proposal.
  • The principles of subsidiarity (i.e. decisions will be taken at national level wherever possible and at EU level where necessary) and proportionality (i.e. only the minimum done to achieve the objective(s)) have been restated.

Lord Hill was questioned about de-regulation; the TSC were clearly sceptical about real progress and pressed him on whether all the previous initiatives had led to any adopted legislation being repealed (apparently not). Lord Hill thought that there was now a more meaningful consensus and explained the process he was undertaking following his Call for evidence on the EU regulatory framework for financial services (which closed on 31/1/16).

Legal status of the settlement – the debate continues

The decision of the heads of state or government meeting within the European Council reflects the fact that the International Law Decision is an international Treaty between 28 Member States. It will be lodged with the UN should the UK vote to remain in the EU in the June referendum (and the new settlement agreement will cease to exist should the UK vote to leave the EU).

In the timescale available for the referendum, it was never going to be possible to change primary EU law (i.e. by amending EU Treaties to reflect the UK settlement) before the UK vote. Nor was it possible to adopt secondary EU legislation (partly because the settlement is itself conditional on the UK voting to remain in the UK).

Different parts of the decision are subject to different approaches to implementation and enforcement – including –

  • Two areas (including the 5 sections on economic governance) are to be the subject of Treaty change.
  • The 5 sections on economic governance are subject to a separate ‘safeguard’ mechanism in a separate statement in Annex II. This is an escalation procedure that enables the UK to refer any breach of the agreement provisions on economic governance (e.g. in relation to proposed legislation which was thought to discriminate against non-Eurozone states) to the Council of the EU (previously known as the Council of Ministers), where it would be discussed by finance ministers, and then potentially to a discussion amongst heads of government (as the European Council). This process, however, does not provide the UK with any veto rights; a Eurozone caucus could continue to proceed with the legislation acting by qualified majority in the Council of Ministers.
  • There is to be secondary EU legislation on welfare. This has to go through the normal co-decision legislative procedure (i.e. a joint decision of Parliament and Council) – the parliamentary process will not be initiated until after the referendum and there is no absolute way of binding the Parliament, at this stage, to adopt the text of the secondary legislation in the package.

Some areas bind the member states to act in a certain way within the Council of Ministers (this technique is used to bring about the agreement on the red card system).

Treaty change. There are no immediate plans to bring forward amendments to the EU Treaties, so the agreement is to incorporate the changes from the UK settlement as and when it is decided in the years to come to change the Treaty for other reasons (most likely triggers are the next accession of countries from South Eastern Europe or changes to reflect Eurozone related reforms). The timing, and to some extent the outcome, is therefore uncertain. Treaty changes – even when they have eventually been agreed by heads of government – are subject to national parliamentary approval and, in some cases, to approval of regional assemblies and national referenda, and can also face challenges before national constitutional courts.

HMG’s document published on Monday has made much of the fact that the agreement is a legally binding Treaty that follows precedent (see previous Irish and Danish agreements (8)). Donald Tusk has reiterated HMG’s position – in a statement to the Council on Wednesday 24 February – i.e. that the decision is legally binding and irreversible. The legal position, however, is complex.

HMG’s document sets out the evidence underpinning their position. The agreement’s legally-binding status has been confirmed by the Council Legal Service. The settlement has three substantive points: (1) agreement as to how the EU Treaties will be interpreted in future; (2) commitment as to how Member States will act in the Council; and (3) Member States, following all appropriate EU procedures, will give effect to the agreement by future Treaty change. HMG has assurances from the Council Legal Service and Prof Sir Alan Dashwood QC that the EU must take into account this new settlement when interpreting the Treaties in the future (9). The Member States are also now bound by this agreement in terms of future conduct in the European Council: a precedent exists (10) that establishes this position regarding the agreement’s ‘red card’ mechanism.

There clearly are limits, however, on the legal effect of the decision. Some are mentioned above under the heading ‘implementation and enforcement’. A further key question for the FS sector is how the UK would enforce the agreement on economic governance, particularly if, for example, a dispute arose over proposed legislation (involving Eurozone caucusing) before the treaties have been amended.

These matters are being carefully scrutinised by the House of Commons European Scrutiny Committee which published a report in December 2015, in which they highlight the potential difficulty and legal uncertainty in achieving a legally binding, irreversible agreement and concluded on the key point above that

It should be made clear to the voters that any such agreement would be consistent with the existing EU Treaties only insofar as it is limited to interpreting or supplementing them. It cannot substantively alter the EU Treaties.

Ahead of the Committee’s next session in March 2016, they have published their own legal analysis of the new settlement. The substantive point made is that the agreement only supplements and clarifies the Treaties: in interpreting the Treaties the ECJ will take this into account but it is not bound by the settlement. Ridout’s (11) analysis of the settlement also challenges the other two HMG points (outlined above). In terms of governing Member States’ actions in Council, this is subject to following and conforming to existing Treaties. Moreover, Ridout argues that future Treaty change is vulnerable: it is dependent on a number of conditional factors such as Member State national referenda outcomes. Ridout identifies uncertainties inherent in HMG’s analysis:

“It does not, and cannot, provide legal guarantees (a) that the CJEU will accept the interpretations provided by the Decision or accept that EU secondary legislation envisaged is compatible with the Treaties (b) that the Treaty change envisaged will come about and (c) that the European Parliament will approve the EU secondary legislation envisaged. These matters are therefore matters of politics rather than legal obligation. It is therefore understandable that the Conclusions do not claim the Decision or the package to be “irreversible”.”

EU legal documents are often the subject of conflicting interpretation – Ridout, in reference to the economic governance provisions, describes the drafting as “dense and complex, reflecting carefully nuanced and balanced political compromise between the Euro-ins and the Euro-outs. It remains to be seen how effective it will be for either “perspective”.” He refers to description by the Financial Times on 20 February that these provisions were “the most consequential part of the agreement, but also the hardest to interpret.”

The concerns seem to be best summarised in layman’s terms as –

  • Will the court simply take account of, but not be bound by, the terms of the agreement on economic governance?
  • Will the court only do so to the extent that the terms reflect an interpretation of the current Treaty texts, but not in so far as they amount to an amendment of the Treaties (before such amendments have been made in accordance with Article 48 TEU)?
  • How will the court interpret and apply EU law (and these nuanced wordings) on these issues in practice (both before and after a Treaty change)?

Lord Hill was pressed on these issues by the TSC. Andrew Tyrie (the chairman) and other committee members had additional concerns –

  • They were critical of the so called ‘safeguard mechanism’ and the statements about the UK having the right to refer disputes to heads of government in the European Council; the agreement did not give the UK such a right. The UK could request, but the agreement gave the President of the Council the power to refer.
  • Andrew Tyrie said that he was advised that the current EU Treaties did not give the EU competence on financial stability. He asked Lord Hill for his understanding. Lord Hill (despite being the Commissioner for financial stability) was not able to answer this point. The Chairman was concerned that the new UK/EU agreement, whilst confirming national sovereignty in this area for non-Eurozone states, referred to this being ‘without prejudice’ to the powers of the EU to take action on financial stability. He suggested this was ‘competence creep’ by the EU and that the agreement might therefore be seen as a ‘Trojan horse’.
  • They pressed Lord Hill on the apparent anomaly that the City protections were said to be consistent with the current EU Treaty but also required changes to the Treaty?

Lord Hill was unable to reassure the TSC on any of these points. He said that as he was not a lawyer and had not negotiated the settlement, he could not give definitive answers (but he has undertaken to write to the committee).

Some may recollect previous occasions when carefully nuanced and complex EU legal texts have not been interpreted or applied by the ECJ as the UK had expected. For example, the House of Commons European Scrutiny Committee reported at length in 2014 (12) on the confusion over whether the UK had an opt-out (under Protocol 30) in relation to the EU Charter of Fundamental Rights. The Committee concluded – “..Protocol 30 is deceptive in looking to a non-lawyer as if it provides an opt-out, when it does not..”

The European Scrutiny Committee is scheduled to meet later this month and intends to pursue further legal analysis of the decision. We await the final conclusions of both committees.

Further reporting on Brexit

You can find further material about Brexit and EU reform on the RegZone Brexit page. This includes a news stream (updated daily) of official publications on this topic (from the UK Parliament, HMG, EU, etc.) and a broader ‘reading list’ of materials that we are using in our research and analysis on this issue.

(1) T-496/11 UK v ECB (ECB location policy case). The UK made an application for annulment with regard to the European Central Bank’s (ECB) location policy for central counterparties (CCPs) and challenged the competence of the ECB to adopt the policy. The location policy required CCPs clearing a certain volume of Euro a day to be located in the Eurozone. The UK’s challenge was found to be admissible even though the UK was not party to Eurozone arrangements. It was held that the ECB had no power and no competence to make policy; the policy was annulled.
(2) C-209/13 UK v Council (financial transactions tax (FTT) case). The UK made an application for annulment with regard to a Council decision authorising 11 Member States to use an enhanced cooperation procedure to set up the FTT. The UK’s grievances were that adoption of FTT produces extraterritorial effect and it would impose costs on non-participating Member States. The UK’s application was dismissed. The court viewed the UK’s action as premature – the UK’s arguments were directed at elements of a future tax.(3)C-507/13 UK v Parliament and Council (CRD IV/Bonus Cap Case). The UK challenged the lawfulness of bonus cap provisions in CRD IV/CRR. The UK argued it was disproportionate; that it would undermine the legal certainty of existing contracts; and expressed concerns regarding disclosure and data protection. Advocate General Jääskinen said the UK pleas should be rejected; the UK dropped the case.
(4) C-270/12 UK v Parliament and Council (Short Selling Regulation (SSR) case). The UK challenged discretionary powers conferred to ESMA under Art 28 SSR; it was argued that this goes against EU principles. The UK’s challenge was dismissed. The court held that Art 28 of the Regulation did not confer any powers on ESMA that went beyond powers granted to ESMA when it was created and was compatible with EU law. However, the Advocate General (here) agreed with the UK on one point: ESMA’s delegated powers did not amount to internal market harmonisation and that Art 28 of the SSR should be annulled.
(5) The House of Commons European Scrutiny Committee found (in its December 2015 report ) that ‘fundamental change’ (a phrase used by the Prime Minister back in March 2015) ‘is not now on the Government’s agenda’ (which now merely sought ‘EU reform’). The Committee concluded - ‘Therefore voters faced with the choice of whether to remain or leave the EU will not have the choice of remaining in an EU with which the UK’s relationship is fundamentally changed.’
(6) This section was the subject of some subtle drafting changes from the original 2nd February text.
(7) House of Commons Select Committee, Fourteenth Report of Session 2015-16: UK Government’s renegotiation of EU membership: Parliamentary Sovereignty and Scrutiny, (page three) 9 December 2015.
(8) These involved two Decisions taken following the rejection, in referenda, of the Maastricht Treaty by Denmark and the Lisbon Treaty by Ireland. Decisions were taken and registered as an international Treaty with the United Nations, pending incorporation in the EU Treaty at a later stage. Doubts have been expressed as to whether this sort of mechanism would work where substantial Treaty change was required, as distinct from the Danish and Irish cases which were arguably about interpretation.
(9) This is in line with the Vienna Convention on the Law of Treaties.
(10) Article 7 of the Treaty on Stability, Coordination and Governance (known as the ‘Fiscal Compact’): 25 Member States entered into this compact and in so doing committed themselves to voting in favour of certain proposals, unless a qualified majority opposed.
(11) Arnold Ridout, Counsel for European Legislation. Author of the legal analysis note published by the House of Commons European Scrutiny Committee.
(12) Click here for the report.