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by Giovanna De Minico, Professor of Public Law, University of Naples “Federico II”, ordinary member of Conseil Superior of the Communications.



I would like to start by saying that though I share the basic spirit of this initiative and its twelve principles, I would moderate an excess of enthusiasm because the successful outcome of the regulatory action depends on its successive implementation. In fact, such generic principles do not go beyond the mere manifestation of intentions, therefore their ability to restore the confidence of the savers in the Financial market will be conditioned by how the political rule-maker will convert them into punctual rules of conduct for the Financial industry, if our Europe, which is not a State, is able to identify a unitary decisional author.

Therefore, the challenge is only at the start.

Let me raise two criticisms against the 12 principles: the first concerning the method, the second the substance.

The first: that posing an unmodifiable common framework by member States has not been attained because of the nature of the principles: soft, not binding rules, which enable to steer the future behaviour of political rule-makers. The latter can comply with them or not, but it must be clear that they will not be forced to implement them. Once again Europe seems unable to go beyond the mere manifestation of intent: the European financial acts offer a good example of ignored moral suasion. 

The second: there are two criticisms, which are not directed towards the twelve principles but rather towards the future legislator. 

The first concerns the space to be granted to the self-regulating different systems of financial markets, which today are too ample and lack a binding legal framework; this has allowed the private interest governments to contend for the operators through light rules and corporative supervision. Contrarily to some American literature, I do not believe that the plurality of Self Regulatory Organizations (SROs) will be ex se able to promote a regulatory race oriented to the top while lacking minimum quality standards, which the SRO regimes must satisfy. These rules should anticipate self-regulation in order to ensure that its exit is compatible with the common good. The 12 principles do not state this; consequently this must be stated by an unmodifiable binding source by the self-regulation of SROs. A common design should also be required of each SRO in such way as to ensure a diffused and balanced participation of the different regulated classes in its rule-making because asymmetrically composed boards have already produced unilaterally oriented rules.

My last objection concerns consumer protection. The only attention to this theme in the 12 principles is the short reference to information transparency, but nothing is said about the presence of the State.  

On my opinion, the State should assist consumers by promoting an updated, intelligible, clear and reliable information flow, thereby allowing the consumers to choose the investment product. Public intervention is not aimed at replacing investors in the assessment of a given investment proposal, assuming that this judgment should remain their exclusive responsibility in line with the “attention calling” method.

The final step of enforcement should provide adequate sanctions for the infringement of the rules; these sanctions should be designed by a single law-maker, observing the parameters of assurance, inflexibility and timeliness of the sanction. The costs generated by the violation of rules should in all cases be higher than the costs of compliance. Only if this equation is applied by the law-maker, the effectiveness of the rule would be enhanced. While concerning the judiciary remedies, the class action should be available in order to offer European collective protection, which has been almost ignored by the member States.

Special attention should be paid when – as in the EU plan - the system multiplies the levels of supervision rather than streamlining them. A sanction must be provided for at each level – i.e. State and supranational – where controls or supervisory duties are not carried out.  If not, the proliferation of agencies would go hand in hand with a watered-down responsibility, or even with the impossibility of laying on anyone the responsibility for a conclusive decision. This wide concept of enforcement would also call for a cross-border single reference figure for Aquilian liability, to which supervisory Authorities should be subjected in the event of non-fulfilment of their institutional tasks. While the European experience has provided for the accountability of the Authorities only in the event of torts committed with malice or gross negligence.

Since there is still a long way to go, I would tend to be less optimistic and more pro-active towards legislators in the future, if  the world Leaders' intent to restore consumer confidence and market effectiveness is to be considered real.

Roger McCormick - Director, Law and Financial Markets Project, London School of Economics



            Prior to the Crisis, London’s success (and the stability of the UK financial system) was built upon the relationship between market participants, those who regulate them, and those responsible for the laws that apply to market transactions. This will remain the case. Although any successful marketplace needs more than just a reliable legal system, if it does not have that as a foundation, it will not last for very long. Bad laws, which may threaten the reliability of bargains entered into in good faith or expose honest businesses to unacceptable hazards, cause risks to arise which, ultimately, can drive markets away. Although the financial markets will tolerate a degree of legal risk, it is rarely welcomed and generally only accepted, grudgingly, if it is unavoidable. The need for vigilance in this area has been intensified as new, fundamentally important, laws have been enacted, in some cases as a matter of urgency, in response to the Crisis.


            The regulatory regime in the UK is complex and its “architecture” is currently a matter of intense political debate. Whatever the architecture, regulated financial institutions are not only governed by laws (as we all are) -- they are also bound by ‘rules’ (some of which are expressed as very broad principles), told what to do by ‘directions’ and ‘requirements’, expected to be steered by ‘guidance’, protected by ‘safe harbours’ (but potentially damned by other ‘evidential provisions’), and required to comply with an ever-increasing number of codes of conduct. And that is just in the UK. The appropriate multiplier can be applied, depending on the number of jurisdictions in which a regulated business has activities.


Is there now a risk that, following the Crisis, we will over-regulate – in an attempt to react to every conceivable link in the causation chain that led to the Crisis? This risk may be exacerbated (in the UK) by the desire of the FSA to correct the impression that it had an unduly “light touch” approach to regulation in the past – an impression that some feel owed more to a desire to promote London as a financial centre than to the substance of how it actually fulfilled its role. It is crucially important to proceed carefully with the reform agenda, linking change, wherever possible, to significant Crisis causes rather than mere “sine qua non” links in the causation chain.


It is also important that zeal for change does not cause us to lose sight of how important legal risk is for the financial markets (and how it may be triggered inadvertently by poorly thought out new laws or regulations). It is indicative of the importance of legal risk that in the “War Game” exercise carried out by the UK regulatory authorities in 2004, to simulate risks to the financial system, the trigger event in the exercise was an imaginary unfavourable decision of the European Court of Justice: a classic example of legal risk. The simulation assumed that the ruling of the court “created a behind-the-scenes run on banks that were heavily exposed to the property sector” according to the Financial Times report of the exercise.



The events that led up to the Crisis and the various responses of government and others in its early phases have had clearly had an impact on legal risk. The Crisis has, for example, resulted in new legislation (the Banking Act 2009), giving the authorities the right to exercise so-called “stabilisation powers”  that can result in the effective confiscation of either shares in banks or the assets of the banks themselves. This law also gave rise to important technical concerns about, for example, the impact on netting arrangements of using the stabilization powers to transfer some (but not all) of a bank’s assets to another institution..




The Crisis has raised concerns about the effectiveness of governance regimes in banks and other financial institutions and, especially, the effectiveness of non-executive directors. It has, generally, triggered widespread demands for more effective regulation in a great many areas, including, possibly, “direct product regulation”. On a more technical level, it has demonstrated the inadequacy of the general corporate insolvency regime for dealing with the complex issues that arise when a high profile international financial institution gets into financial difficulties and has raised some issues of particular complexity in the context of the insolvency of investment banks. The combined effect of the changes in the bank insolvency regime in the UK, the likely changes in governance rules and the fact that (for the time being at least) so many major banks have large public sector shareholders goes to the heart of what kind of legal animal a bank actually is.




Bank insolvencies triggered by the Crisis have also caused market participants to re-think some of the standard provisions in documentation that had tended to be based on the assumption that the collapse of a bank as well known as, say, Lehman Brothers was, in practice, “unthinkable”. Documentary legal risk is still with us.



The various “Ponzi” schemes and other frauds exposed by the Crisis have had their own legal risk consequences and spawned a great deal of related lawsuits. The Crisis has tended to expose a number of “Ponzi” frauds because the downturn has forced many investors to seek the return of capital invested rather than simply enjoy the above-average “income”. Indeed it is thought that the publicity generated by Madoff may have caused other investors to ask questions leading to the exposure of comparable frauds. The scandal is also thought to have inflicted reputational damage on the hedge fund industry, which shrank by 1,200 funds to just over 9,050 funds between mid-2008 and mid-2009.




Litigators are by nature imaginative. A legal action has, for example, been brought recently by various “green groups” against the UK Treasury to require it to use the government shareholding in RBS to force the bank to give financial support only to projects that satisfied certain environmental and human rights standards.





Whenever significant amounts of money are lost, disputes are likely to follow if the making of a claim (preferably against a deep-pocket target) has the remotest chance of resulting in some recovery – even after an out-of-court settlement. The Crisis is no exception to this general rule of behaviour. As with the Madoff affair, criminal charges also tend to be on the agenda and heightened regulatory scrutiny is inevitable.




At the time of writing the tsunami of litigation, criminal proceedings and regulatory action shows no signs of abating. Not only has the Crisis made certain kinds of claim virtually inevitable, it has also worsened the reputation of banks (which was not very high in the first place) to the point where they are “fair game” for any reasonably inventive litigant who can find an ambitious lawyer prepared to take a risk on a contingency fee arrangement.




There have been many “responses” to the Crisis from regulators, governments, supra-national authorities and others. Everyone has had a chance to “have their say” and few have resisted the opportunity. In some cases, the responses have tended to reflect a pre-existing political agenda. In the UK, the very nature of the regulatory system has become a party political issue. The responses reflect the passions that the Crisis has aroused. This is hardly surprising, at least at the political level. However, the contribution of lawyers to finding the best road forward needs to be in the best traditions of the profession: analytical, objective and dispassionate. That contribution should also, perhaps, be a little more forthcoming than has been the case to date?

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