Since the early ’90s, the European Union has been building a set of rules meant to morph the traditionally bank-based financial market of Continental Europe into a market-based financial system (with the United States model by and large used as a blueprint). Using investor protection as a case study, it emerges that the tools employed by the EU law-maker have been, on the one hand, regulatory public-law conduct-of-business rules (with a view to adapting relationships traditionally regulated by national private laws to the desired new market infrastructure) and, on the other hand, public enforcement mechanisms (to deploy in order to concretize such conduct-of-business rules). In both cases, the EU Law grip has been increasing over the years.

The use public-law conduct-of-business rules imply that the EU law is inherently regulatory and detached from the contract itself. Evolutionary speaking, with a view of building the single market, the disclosure paradigm firstly became increasingly harmonized through EU public law, and, then, it was used as supervisory tool and extended to retail investors (with the main difference between institutional and retail investors being disclosure’s accuracy and understandability). The sequential set of UCITS Directives – and the shift from the simplified prospectus to the Key Investor Information Document (KIID) – proves an increased interest toward less sophisticated investors and their understanding of products through comparison by means of standardization. As the new century unfolds, 2004 MiFID I marked a change – confirmed by MiFID II – due to the fact that, even if its conduct-of-business rules are entrenched into the disclosure paradigm pushing for indirect public harmonization of private laws and instrumental use of the contract, such paradigm is partnered with the suitability and appropriateness tests meant to promote investors’ engagement. These tests compel investment service providers to take into account the knowledge, experience, and risk inclination of their client, in order to promote and accompany an investor’s (more or less autonomous) ability to make investment decisions. A decade later, the 2014 PRIIPs Regulation thrusts the EU regulatory splinter even deeper into private law.

Uniform, standardized pre-contractual (public) rules raising civil liability on the part of the service provider are established to protect the weaker parties, make them confident to access the market, and create a level playing field where products are easily comparable through competitive (between products) and contractual (on counterparties reciprocal rights, in particular the duties of the stronger party) transparency. Unlike PRIIPs, 2014 MiFID II does not prescribe any standardized formats, although it in detail clarifies which information must be provided and increases ex ante and ex post sales information disclosure on the total costs and charges (one-off and ongoing) and on the cumulative effect of such costs on the return of the investment, for both the service and product provided, thus corroborating the regulatory nature of EU law.

If the EU law is inherently regulatory and detached from the contract, so are its enforcement procedures. MiFID I strongly relies on public rather than private enforcement (either single or collective). A confirmation of this is clearly given by the role of supervisory administrative bodies depicted by Articles 48-51. Articles 48 provides for the designation of one National Public Authority, while Articles 50 and 51 harmonize domestic administrative laws through a range of investigatory, supervisory, and sanctioning powers. Private enforcement is overlooked, to say the least. Against this backdrop, the 2010 Regulation establishing the European Securities & Markets Authority kicked off a process of public enforcement centralization by endowing ESMA with the power to prohibit or restrict financial activities that are highly likely to threaten the orderly functioning and integrity of financial markets or the stability of the whole or a part of the EU financial system. Since then, some pieces of EU Law have leveraged on this provision. In particular, 2014 MiFIR sets forth product intervention powers for ESMA to step in if domestic “competent authorities have not taken action to address the threat or the actions that have been taken do not adequately address the threat.” (Article 40, 2c). MiFIR, thus, corroborates the centralization trend opened by 2010 ESMA Regulation but it is yet to be tested to what extent ESMA will use its new powers. Significantly, the regulatory nature of EU Law also brings about changes in European investment firms. As a matter of fact, EU provisions work as a lowest common denominator and as lingua franca for pan-European firms, in particular when it comes to grant firm-wide fulfillment with local regulatory requirements stemming from EU Law.

It is very likely that EU Law grip on domestic laws will keep increasing over the years, even because of Brexit. Indeed, Brexit poses a series of new challenges to the European banking and financial markets and, as a result, to EU Law. It is commonly known that the London hub provides a wide range of financial services to European financial institutions and an interruption of the provision of these may have severe spill-over effects on the Mainland’s markets (retail included). As for the short/mid-term, temporary equivalence seems to be the solution. However, the EU Law will likely undergo reforms aimed at stabilizing and further standardizing the European markets even through additional enforcement centralization. In a few words, Brexit may underpin the already existing regulatory leitmotiv, accelerate the centralization trend of EU law, and deliver to the EU law-maker the de-facto legitimacy to successfully wrestle away regulatory powers for the benefit of the Single Market participants thus increasing the regulatory capacity of the EU and, prospectively, hollow out one of the Brexit’s goals.

Antonio Marcacci, author of Regulating Investor Protection under EU Law, is a compliance professional in a leading European GSIB (Global Systemically Important Bank).