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Summary Financial Law
WEEK01 – Primary Markets
Chapter one – Sources of European Financial Law
Of the various EU legislative sources, Treaties carry the most weight; they are the primary sources.
Other statutes and decisions are considered to be of second nature. Such secondary legislation can
be binding (regulations, directives or decisions) or non-binding (recommendations and opinions).
As far as the Treaty on the Functioning of the European Union is concerned, there are four
fundamental freedoms: free movement of goods; free movement of persons, free movement of
services; and free movement of capital. In regard to the banking and financial sector, the last two are
most important. If a bank established in one of the current member states wished to offer its banking
services on one, some or all of the other member states, it is permitted to do so, in light of the
freedom of movement of services (and capital).
Regulations are directly applicable in all Member States and binding in its entirety (art. 288 TFEU).
Member states are not permitted to enact any implementing norm in order to apply it. Directives
have to be implemented into national legislation. Its implementation is mandatory and bound by a
strict timeframe.
On the history of European banking and financial law
The First Banking Directive, originated in the 1970s, was an early example of the formation of
common rules applicable exclusively to credit institutions. This directive failed as is was rather poorly
forged, and it maintained the obligation that authorisation be granted not only by the home state,
but also by each and every host EEC state where the bank wished to conduct business (no European
passport).
These flaws were addressed by the Second Banking Directive. It granted the notion of the European
passport. The European passport is linked to “passported activities” which can be found in Annex I
Regulation (EU) 575/2013 (the successor of the Second Banking Directive).
The main reserved activities are:
1. Acceptance of deposits or other repayable funds;
2. Lending including consumer credit, mortgage credit, factoring, with of without recourse,
financing of commercial transactions (including forfeiting).
The three pillars on which the notion of the European passport rests:
1. Authorisation in the home state must also be deemed to sanction passported activities in
other host states. No additional consent by the host state is required, but the host state
needs to be notified.
2. Increasing harmonisation of legislation regulating the banking industry in terms of standards
and requisites applicable to the entire spectrum of EEA countries (European Economic Area),
thereby giving rise to a reduction or minimisation in disparities among relevant legislation.
3. Upon authorisation by the relevant authority in an EEA country, that consent automatically
identifies the authority in charge of supervising the stability of the financial institution,
irrespective of where in the EEA that enterprise wishes to perform its business activities
(home country control-principle).
,Lamfalussy Report
It consists of a document detailing a set of recommended guidelines conducive to a more efficient
law-making process in the union, in regard to the financial sector. In short, the Lamfalussy process
discerns the following:
Level 1: the adoption of Directives and Regulations by the EU, in accordance with the co-
decision procedure.
Level 2: the implementation of additional legislation at EU-level, the purpose of which is to
fill in the details.
Level 3: a focus on cooperation among national supervisors, so that consistent
implementation and enforcement can be ensured.
Level 4: a more effective enforcement of EU legislation.
EU banking legislation can be defined with a number of features:
The banking business is a reserved one, meaning that typical banking activities are not
available to anyone, but rather exclusively to those that satisfy the minimum legislative
requirements such as having the necessary capital and adequate managerial skills.
The business is supervised highly. Authorities can withdraw licences.
Banking activities are passported: once authorisation had been granted to a bank in a MS, no
further authorisation is required in other MS.
De Larosière Report
The report was commissioned against the backdrop of the economic crisis and the recession. It
emphasised three steps to guard against a future collapse:
A new regulatory agenda;
Stronger coordinated supervision;
Effective crisis management procedures.
It has resulted in the creation of a European System of Financial Supervision (EFFS). It consists of
three European Supervisory Authorities: the European Banking Authority (EBA), European Securities
Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).
These authorities are empowered to issue binding Regulatory Technical Standards and Implementing
Technical Standards in addition to non-binding guidelines and recommendations.
Single Supervisory Mechanism
In a fully integrated market of credit institutions reaped the benefits of a single market which
afforded them the tools to expand and operate at a greater pace across Europe, while the
fragmented subsistence of a body of supervisors as numerous as the various countries constituting
the EU was evident.
This flaw in the architecture of the EU banking system has recently be revisited by the creation of the
Single supervisory Mechanism (SSM). This legislative structure is hinged upon the European Central
Bank (ECB), which, in assuming this new additional role, is responsible, in conjunction with the
national supervisors, for the prudential supervision of the credit institutions of all banks operating in
the Eurozone.
Chapter 2 – The Stock Market
One of the functions of a stock market are to facilitate the exchange between demand and supply of
transferable securities or, financial instruments.
Securities: tradable/transferable financial asset (effecten). We commonly distinguish equity securities
and debt securities.
, Debt security: involves borrowing money (bonds). Government and corporate issued.
Equity securities: represent ownership in a company, such as a stock.
Primary market: is where new securities are issued. The primary market creates new securities and
offers them for sale to the public initial public offering (IPO) and follow-on public offering (FPO).
Secondary market: this is where the trading of securities takes place, through a stock exchange, bond
market or derivatives exchange. In the secondary market, the money goes to the investor who is
selling the security, and not the company that first issued the security.
MiFID definition of transferable securities:
Those classes of securities which are negotiable on the capital market, with the exception of the
instruments of payment, such as:
1. Shares in companies and other securities equivalent to shares in companies, partnerships
and other entities, and depositary receipts in respect of shares;
2. Bonds or other forms of securitised debt, including depositary receipts in respect of such
securities;
3. Any other securities giving the right to sell or acquire any such transferable securities or
giving rise to a cash settlement determined by reference to transferable securities,
currencies, interest rates or yields, commodities or other indices or measures.
NB: a security cannot be a share or a bond.
Rules governing a stock exchange
The interaction between European and national statues in this area of law is mainly based on a dual
layer, where an EU piece of legislation (usually a directive) fixes norms, and at a national level these
norms are subsequently implemented by each member state.
As long as the specific provisions do not infringe the relevant directive, divergences do not give rise
to any concern in terms of legitimacy and legality.
Stock markets have undergone a dramatic transition over the past three decades, advancing from a
scenario where they were formerly ‘public’ to a more competitive system where each market is
perceived to be ‘private’, and the entity in charge of its organisation (market company or operator) is
considered a ‘private’ company, incorporated and functioning in accordance with the corporate law
rules on private companies.
The organisation and business of a stock exchange is predominantly a regulated activity, to be
authorised by the national authority and subject to supervision during the pursuit of the relevant
business.
The stock exchange has been profoundly influenced by the harmonisation process: MiFID II.
The operator is tasked with requirements, not simply at the start of the business, but also later for
the duration of its lifespan.
A stock market shall be subject to the regulation of the country it is authorised in.
The admission of securities to a stock market
For financial instruments to be transferable, the company has to go “public”. It usually relies on the
cooperation of one or more financial institutions to which a mandate is given to aid the specific
securities of that issuer being admitted to the market (financial advisor is called “arranger”). Its
mandate involves two activities:
The listing of the securities on the regulated market;
Drafting of the prospectus and its subsequent submission to the competent authority for
approval, if indeed it is required.
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