Bringing EU regulation home – a sign of things to come?
A short recent judgment is a reminder of the need for financial institutions to keep an eye not only on what their home regulator is doing, but also European regulators.
By way of background, the European Securities and Markets Authority (ESMA) was established as part of the move towards more integrated financial supervision within the EU following the financial crisis. Among other roles, ESMA has responsibility under the 2012 European Markets Infrastructure Regulation (EMIR) for the registration and supervision of trade repositories, which retain records of derivatives trading.
Under Article 63 of EMIR, ESMA is permitted to carry out on-site inspections, with or without notice, at any business premises of the trade repositories. Under Article 66, failure by a trade repository to agree to an inspection can lead to a daily fine of 3% of its average daily turnover in the preceding business year, for up to six months. In England, ESMA must also obtain authorisation from the High Court before carrying out an on-site inspection.
The first application of this kind was made recently in ESMA v DTCC Derivatives Repository Ltd. There was no suggestion of any wrongdoing by the trade repository, and indeed it had consented to the inspection in writing. The High Court therefore had to decide only if it was satisfied that (i) ESMA has decided to carry out an inspection and (ii) the inspection would be neither arbitrary nor excessive (ie it was proportionate). Under the relevant regulations, the High Court is not permitted to assess whether the inspection is necessary, which is for ESMA alone to decide.
After satisfying herself that all of the basic requirements for the exercise of ESMA's power had been met, Rose J granted the authorisation, with one caveat. This was to introduce a rider to the effect that the inspection could not be used to require the disclosure of privileged information (as set out in Article 60 of EMIR). Rose J stated specifically that this was to ensure that the inspection was neither arbitrary nor excessive.
Interestingly, however, there was no discussion of what the ambit of privilege in this context might be. Given that ESMA relies on an EU regulation, it may well adopt the ECJ's view of privilege in a competition context, ie that it does not apply to communications with inhouse legal counsel, but only to communications with external lawyers.
This case is very specific to its facts and regulation and the court gave guidance that suggests that in most cases, such applications will be heard on paper, limiting the number of future public reasoned judgments in this area. However, the case highlights the trends of increasing European supervision at a national level. Competition lawyers have long been familiar with local enforcement by both the European Commission and national regulators. As European financial regulation becomes ever more centralised, financial institutions are likely to face the same issues – which may well have wider consequences than initially expected.