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The Role and Functioning of Mutual Recognition in the European Market of Financial Services

Published online by Cambridge University Press:  17 January 2008

Matteo Ortino
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Abstract

In Europe part of the rule-making and the whole enforcement of financial services regulation still take place at national level. For this reason, mutual recognition of national financial laws remains an element of central importance in the creation and regulation of a European market in this field. This article seeks to contribute to the analysis of such legal instrument, as several aspects of its functioning often appear unclear. The article starts by analysing the principle of mutual recognition as developed by the European Court of Justice. An important distinction is drawn between such judicially created principle and the principle of mutual recognition applied by the EC legislator. The article then looks at the question of why mutual recognition has not succeeded as a regulatory mechanism of financial services market integration, and at the role of mutual recognition after the introduction of the so-called ‘Lamfalussy’ law-making process to the financial services sector.

Type
Research Article
Information
International & Comparative Law Quarterly , Volume 56 , Issue 2 , April 2007 , pp. 309 - 338
Copyright
Copyright © British Institute of International and Comparative Law 2007

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References

1 In the WTO law context, for example, the General Agreement on Trade in Services (GATS) provides for mutual recognition among WTO Member States of authorization, licensing, or certification of services suppliers (Art VII).

2 Art 47 EC provides for directives to be issued for the ‘mutual recognition of diplomas, certificates and other evidence of formal qualifications’ to facilitate the freedom of establishment for the self-employed. Art 293 EC states that Member States shall enter into negotiations with one another to ensure ‘the mutual recognition of companies and firms’. Mutual recognition in the EU has been recently extended to criminal law matters. See Peers, S, ‘Mutual Recognition and Criminal Law in the European Union: Has the Council Got it Wrong?’ (2004) 41 CMLR 5–36.Google Scholar

3 Case 120/78 Cassis de Dijon [1979] ECR I–64.Google Scholar

4 ‘Completing the Internal Market’, White Paper from the Commission to the European Council, COM(85) 310 final.

5 The ‘Cassis de Dijon’ doctrine has spread from goods to the other fundamental freedoms, including the freedom of services, while the Commission's proposal in the White Paper was sanctioned in the 1987 Single European Act and has become the new approach of the subsequent liberalization directives in the financial services sector, substantially based on the principle of mutual recognition and on essential harmonization. This approach was new when compared with the original approach to harmonization aimed at introducing detailed harmonized rules so that the standards applicable in each Member State would be equivalent. In the White Paper the Commission noted that ‘experience has shown that the alternative of relying on a strategy based totally on harmonization would be over-regulatory, would take a long time to implement, would be inflexible and could stifle innovation’ (para 64).

The ‘Cassis de Dijon’ doctrine has also expanded geographically, outside the borders of the European Community. Through the conclusion of the EEA (European Economic Area) Agreement and the EC–Turkey customs union, the principle of mutual recognition has, with some variation, now been extended to goods coming from Norway, Iceland and Liechtenstein (as EEA members) and Turkey. In order to implement this principle the European Commission has insisted that EU Member States insert a ‘mutual recognition clause’ in their technical legislation. The actual implementation of such clauses might have the effect of giving a preference to goods originating from the above-mentioned countries compared to goods of other non-EU origin. Bartels, L, ‘The Legality of the EC Mutual Recognition Clause Under WTO Law’ (2005) 8 J Int Econ L 691–720CrossRefGoogle Scholar, examines whether this poses any problems under WTO law.

6 Case 76/90 Saeger v Dennemeyer [1991] ECR I–4221.Google Scholar

7 In the Court's interpretation, the non-discrimination rule exclusively prohibits unequal treatment, de jure and de facto, of providers resulting from the law of a single national legal system. That ban does not remove restrictions deriving from differences between national regulations. See Santiago, M Gardeñes, La aplicación de la regla de reconocimento mutuo y su incidencia en el comercio de mercancías y servicios en el ámbito comunitario e internacional (Eurolex, Madrid, 1999) 57Google Scholar; Fallon, M, ‘Les conflits de lois et de juridictions dans un espace économique intégré. L'expérience de la Communauté européenne’ (1995) 253Google ScholarRecueil des Cours de l'Académie de droit international de la Haye 13, 119–40, esp 123.Google Scholar The Court found indistinctly applicable measures to be unlawful in so far as they are imposed on providers that are already subject to the home State regulation. These measures create an additional regulatory cost for foreign providers and put them at a disadvantage compared with domestic providers. In carrying out such an assessment the Court has never used the concept of discrimination. See, eg, Case C-272/94 Guiot [1996] ECR I–1905, para 14.Google Scholar

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9 Case 76/90 Saeger v Dennemeyer [1991] ECR I–4221, para 12.Google Scholar

10 ibid; Case C-43/93 Vander Elst [1994] ECR I–3803, para 14Google Scholar; Case C-272/94 Guiot [1996] ECR I–1905, para 10Google Scholar; Joined Cases C-369/96 and C-376/96 Arblade et al [1999] ECR I–8453, para 33.Google Scholar

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13 Weiler, JHH, ‘The Constitution of the Common Market Place: Text and Context in the Evolution of the Free Movement of Goods’ in Craig, P and G de, Búrca (eds), The Evolution of EU Law (OUP, Oxford, 1999) 365, accrediting the term ‘functional parallelism’ to Alan Dashwood.Google Scholar

14 ibid 367.

15 For the same view see Bernard, N, ‘Flexibility in the European Single Market’ in Barnard, C and Scott, J (eds), The Law of the Single European Market. Unpacking the Premises (Hart Publishing, Oxford and Portland, 2002) 101–22, 104.Google Scholar On this interpretation see Hatzopoulos, V, Le principe communautaire d'équivalence et de reconnaissance mutuelle dans la libre prestation de services(Athènes, Bruylant, 1999) 67 ffGoogle Scholar; Armstrong, KA, ‘Mutual Recognition’ in Barnard, C and Scott, J (eds), The Law of the Single European Market. Unpacking the Premises(Hart Publishing, Oxford and Portland, 2002) 225–67, 249.Google ScholarMattera, A, ‘Les principes de “proportionnalité” et de la “reconnaissance mutuelle” dans la jurisprudence de la Cour en matière de libre circulation des personnes et des services: de l'arrêt “Thieffry” aux arrêts “Vlassopoulou”, “Mediawet”, et “Dennemeyer”’ (1991) 4 Revue du Marché Unique Européen 191–203.Google Scholar

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17 ibid.

18 Case 76/90 Saeger v Dennemeyer [1991] ECR I–4221, para 15. Emphasis added.Google Scholar

19 Joined Cases 110 and 111/78 Van Wesemael [1979] ECR I–35, para 28Google Scholar: ‘Specific requirements imposed [by the host State] on persons providing services cannot be considered incompatible with the Treaty … in so far as the person providing the service is not subject to similar requirements in the Member State in which he is established.’ See Snell, J (n 16) 183.Google Scholar

20 The equivalence must exist between the objectives and not necessarily between methods and instruments adopted to achieve such objectives. Hatzopoulos, V (n 15) 71Google Scholar; Santiago, M Gardeñes (n 7) 60.Google Scholar

21 The objective is not the same if the degree of protection of the public interest at which the laws aim is different. This, however, does not mean that Member States enjoy limitless freedom in determining the level of protection. The third derogation test (the proportionality test stricto sensu) restricts such freedom. With regard to the equivalence between two national investor-protection legislations see Case C-384/93 Alpine [1995] ECR I–1141, and the relative Opinion of AG Jacobs, para 90.Google Scholar

22 Case 279/80 Webb [1981] ECR I–3305, para 21.Google Scholar

23 Case C-293/93 Houtwipper [1994] ECR I–4249, para 27.Google ScholarCase 205/84 Commission v Germany (Insurances) [1986] ECR I–3755, paras 36 ff.Google Scholar In the literature, on the equivalence between national control mechanisms, see Bernel, A (n 12) 85 ffGoogle Scholar; Santiago, M Gardeñes (n 7) 214, n 100.Google Scholar

24 Case C-384/93 Alpine [1995] ECR I–1141.Google Scholar

25 ibid, para 48.

26 It is important to note that a rule can be a private and a public law rule simultaneously. In such cases the breach of the rule can trigger consequences both of a public law nature (eg criminal, administrative sanctions) and of a private law nature (eg liability in tort).

27 For the opposite interpretation see, eg, Bernard, N, ‘La libre circulation des marchandises, des personnes et des services dans le Traité CE sous l'angle de la competence’ (1998) 34 Cahiers de droit europ´en 11, 32 ffGoogle Scholar; Bernard, N (n 15) 105.Google Scholar

28 Case C-384/93 Alpine [1995] ECR I–1141.Google Scholar

29 ibid para 43.

30 Case C-233/94 Germany v Parliament and ouncil [1997] ECR I–2405.Google ScholarLandsmeer, A and Empel, M Van, ‘The Directive on deposit-guarantee schemes and the directive on investor compensation schemes in view of Case C-233/94’ (1998) July–Aug European Financial Services Law 143–52.Google Scholar

31 Directive of the European Parliament and of the Council of 30 May 1994, OJ L135/5.Google Scholar

32 Art 4 (2) requires Member States to include in their deposit-guarantee schemes the branches of credit institutions authorized in other Member States so that they supplement the guarantee already enjoyed by their depositors on account of their affiliation to the guarantee system of their home Member State.

33 Case C-233/94 Germany v Parliament and Council [1997] ECR I–2405, para 64.Google Scholar

34 Hatzopoulos, V (n 15) 85Google Scholar ff does not deem the (judicial) principle of mutual recognition to be a conflict rule either. Some commentators think differently; see Gkoutzinis, A, ‘Free Movement of Services in the EC Treaty and the Law of Contractual Obligations Relating to Banking and Financial Services’ (2004) 41 CML Rev 119, 146 ffGoogle Scholar; Fallon, M and Meeusen, J, ‘Private International Law in the European Union and the exception of mutual recognition’ (2002) 4 Yearbook of Private International Law 37–66.Google Scholar

35 Brozolo, LG Radicati di, ‘L'influence sur les conflits de lois des principes de droit communautaire en matière de liberté de circulation’ (1993) 82 Revue critique de droit international privé 401–24.Google Scholar

36 The issue of when conflict-of-laws rules are to be regarded as restrictions to free movement across Member States has come up recently in relation to cases concerning the relationship between private international law in the field of company law and the freedom of establishment. Case C-208/00 Überseering [2002] ECR I–9919Google Scholar is particularly relevant to the present analysis, as it deals with a ‘situation’ being subject to two conflicting national legislations. A company formed in accordance with the law of a Member State is deemed, under the conflict-of-law rule of another Member State, to be non-existent. The obligation to recognize each other's laws is breached at its core: a company is a creation of a national law, it can exist and stop existing only by virtue of that legislation (see para 67 of the Überseering judgment). The other national systems cannot but recognize such existence. Denying legal personality to a foreign company cannot absolutely be justified, as it is ‘tantamount to an outright negation of the freedom of establishment’ (para 93).

37 Pelkmans, J, ‘Mutual Recognition in Goods and Services: An Economic Perspective’ (2003), Working Paper 16, European Network of Economic Policy Research Institutes, p 8Google Scholar, uses the terms ‘judicial mutual recognition’ and ‘regulatory mutual recognition’.

38 Contra M Gardeñes Santiago (n 7) 185 ff. On this issue see also Armstrong, KA (n 15) 233Google Scholar

39 See for example Art 32 (7) of the Directive 2004/39/EC of the European Parliament and of the Council of 21 Apr 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ 2004 L 145/1 [MiFID].

40 See, eg, Art 3 of the Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce), OJ 2000 L178/1Google Scholar [ECD]. Hörnle, J, ‘Country of Origin Regulation in Cross-Border Media: One Step Beyond the Freedom to Provide Services?’ (2005) 54 ICLQ 89, 111 ffGoogle Scholar, draws a distinction between the freedom to provide services and the ‘country of origin’ rule (contained in the ECD). She argues that there are two differences. The first is that only the freedom of service involves a comparison between the law of the State of origin and the law of the State of destination in order to determine whether there is an obstacle; in addition, unlike the freedom of services, the country of origin is a ‘competence rule’ (p 113). The second is that only the freedom of services applies to the export of services, in addition to the ‘import’ of services. I agree that the freedom of services (more precisely its ‘mutual recognition’ component) does not allocate competences, and that only the freedom of services governs both the export and import of services. However, I do not agree on the first point. As explained in the text below, the comparison between laws is part of the exception to the freedom of services rule, but the country of origin rule is also subject to the same type of exception (as part the proportionality tests) (see Art 3(4) of the ECD).

41 An exception is the Electronic Commerce Directive, where competences and responsibilities have been allocated without essential harmonization (eg online investment firms' conduct of business rules).

42 See text below.

43 Case 222/95 Parodi v Banque de Bary [1997] ECR-I 3899, paras 22–6.Google Scholar The judgment, however, should not be read as supporting the conclusion that in business areas such as banking, particularly sensitive to ‘general good’ concerns, ‘judicial’ mutual recognition does not apply (or work) at all, and that only the ‘legislative’ principle of mutual recognition applies. In that very same judgment (para 29), for example, the Court states that, as regard the protection of a bank's borrowers, there may be cases where, because of the nature of the loan and the status of the borrower, the application of borrower-protection rules of the host Member State is not needed and thus not justified.

A different argument is that the judicial principal of mutual recognition in the financial services sector is often not applied even though all the legal conditions necessary for its application are satisfied. As argued below, because of inadequate enforcement of EC law, the ‘general good’ exception clause in the field of financial law is often abused, that is, invoked without being supported by the conditions required by the proportionality principle. The objective behind such practice is generally of a protectionist nature.

44 See Case C-384/93 Alpine [1995] ECR I–1141.Google Scholar

45 In financial services the new approach was first adopted in 1989 in the Second Banking Directive (89/646, OJ 1989 L386/1Google Scholar, now part of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast), OJ 2006 L177/1Google Scholar (hereinafter the ‘Recast Banking Directive’). It is interesting to note, however, that the First Banking Directive of 1977 already envisaged mutual recognition of banking regulations as the objective to aim at (Directive 77/780 OJ 1977 L 322/30, third Recital). Furthermore the home country control principle had been introduced in the field of financial services by Directive 85/611 (OJ 1985 L375/3Google Scholar) relating to undertakings for collective investment in transferable securities (UCITS). The new approach was extended from banks to investment firms by Directive 93/22/EEC on investment services (OJ 1993 L141/27) [ISD], to be replaced by the MiFID.Google Scholar

46 Exceptionally, under Art 27 of the Consolidated Banking Directive, host Member States shall retain responsibility in cooperation with the competent authorities of the home Member State for the supervision of the liquidity of the branches of credit institutions pending further coordination.

47 eg, in regulating investment firms' right of secondary establishment, the MiFID provides that ‘[b]y way of derogation from the principle of Home country authorisation, supervision and enforcement of obligations in respect of the operation of branches, it is appropriate for the competent authority of the Host Member State to assume responsibility for enforcing certain obligations specified in [Art 32 (7)] of this Directive in relation to business conducted through a branch within the territory where the branch is located, since that authority is closest to the branch, and is better placed to detect and intervene in respect of infringements of rules governing the operations of the branch.’ Recital 32 of the MiFID.

48 eg Art 62 (1) of the MiFID, governing the power-duty of the host State to apply precautionary measures to a foreign investment firm that is ‘acting in a manner that is clearly prejudicial to the interests of host Member State investors or the orderly functioning of markets …’ Art 3 (2) and (4) of the ECD provides for a series of substantial and procedural requirements that a Member State must meet before it may impose, in the ‘coordinated field’, its rules on cross-border online suppliers established in a different Member State (State of Origin). Elsewhere the conditions required by European legislation in order to derogate from the legislative principle of mutual recognition amount to the conditions provided for in the ECJ case law to derogate from the judicial mutual recognition. The European legislator usually refers to these conditions using the ‘general good’ clause. See, eg, Art 19 (6) of the ISD.

49 eg the ‘country of origin’ rule of the ECD does not apply to certain sectors listed in the Annex to the Directive.

50 This is often expressly stated in EC legislation itself through the inclusion of a ‘general good’ exception clause. For example, Art 37 of the Recast Banking Directive stipulates that credit institutions may advertise their services in host Member States but ‘subject to any rules governing the form and content of such advertising adopted in the interest of the general good.’ The ‘general good’ reference means that the exercise of regulatory and supervisory powers as regards advertising, as it is not covered by home country rule-control, is subject to the freedom of services regulation and its exceptions. The host State may derogate from the judicial principle of mutual recognition if and to the extent that the three proportionality (or ‘general good’) tests are met.

51 See the assessment of EC securities regulation carried out by the Committee of Wise Men on the Regulation of European Securities Markets (‘Lamfalussy Committee’), resulting in the adoption of two reports: the Initial Report (Nov 2000), and the Final Report (hereafter called ‘the Lamfalussy Report’) (Feb 2001). The Committee was set up in July 2000 by the Economic and Finance Council of the EU (Ecofin) with the task, inter alia, of assessing the effectiveness of EC securities regulation in integrating national markets. On the reforms proposed by the Committee, see below.

52 A comprehensive market abuse regime, rules on takeovers, and on alternative trading systems, conduct business rules of investment firms, were some of the highlighted regulatory lacunae.

53 European Commission, Financial Services: Implementing the Framework for Financial Services: Action Plan (COM(1999) 232 final).Google Scholar In the FSAP—endorsed by the Lisbon European Council in March 2000—the Commission proposed a number of measures and a timetable of legislative actions in the field of financial instruments and services necessary for the integration of national markets.

54 The host State is not entitled to use such argument and obstruct the free movement of firms. If, in its view, the home State is not applying harmonized regulation correctly, the host State— apart from possible exceptions to the mutual recognition obligation expressively provided for by the EC legislator (eg Art 61 (1) of the MiFID)—may only rely on the general infringement procedures provided for by the EC Treaty (Arts 226 and 227). See Tison, M, ‘The Investment Services Directive and its Implementation in the EU Member States’ (1999) Working Paper 17, Financial Law Institute, 1–35, 19–21.Google Scholar

55 Weiler, JHH (n 13) 368Google Scholar considers mutual recognition ‘a colossal market failure’, especially because ‘one cannot plan, produce and market product lines hoping that eventually a court decision will vindicate a claim of mutual recognition or functional parallelism’.

56 The Lamfalussy Report (n 51) 50.

57 See Communication from the Commission—The application of conduct of business rules under Article 11 of the investment services Directive (93/22/EEC), COM/2000/0722 final, 11.Google Scholar

58 The literature on the subject is already vast. See, for example, Lannoo, K, ‘The Transformation of Financial Regulation and Supervision in the EU’ in Masciandaro, D (ed), Handbook of Central Banking and Financial Authorities in Europe. New Architectures in the Supervision of Financial Markets (Edward Elgar, Cheltenham, 2005) 485–513.Google ScholarFerrarini, G, ‘Contract Standards and the Markets in Financial Instruments Directive (MiFID): An Assessment of the Lamfalussy Regulatory Architechture’ (2005) Institute for Law and Finance Working Paper Series No 39, pp 9 ff, <http://www.ilf-frankfurt.de/publications/ILF_WP_039.pdf>>Google Scholar; Ferran, E, Building an EU Securities Market (CUP, Cambridge, 2004) 61 ffCrossRefGoogle Scholar; Hertig, G and Lee, R, ‘Four Predictions about the future of EU Securities Regulation’ (2003) 3 Journal of Corporate Law Studies 359–78.Google Scholar

59 See n 51.

60 OJ 2003 L96/16.Google Scholar

61 See Explanatory Memorandum (I.3) introducing the Proposal for a Directive of the European Parliament and of the Council on investment services and regulated markets, and amending Council Directives 85/611/EEC, Council Directive 93/6/EEC and European Parliament and Council Directive 2000/12/EC, COM(2002) 625 final—COD 2002/0269Google Scholar, OJ 71 E, 25/03/2003, p 62.Google Scholar

62 Under Art 202 EC, the Council (together with the European Parliament, when the latter acts as co-legislator) may confer on the Commission the power to execute European legislation. ‘Comitology’ refers to the procedures under which implementation committees (the so-called ‘comitology committees’), composed of policy experts from the Member States, assist the Commission in carrying out that task. These procedures are governed by Council Decision 1999/468/EC on comitology (OJ 1999, L184/23).Google Scholar

63 The double objective pursued at level 3 of the Lamfalussy reform, concerning the convergence and the effectiveness of regulation and supervision, is easily recognizable when going through the tasks conferred upon the technical committees. See, for example, paras 2 and 3 of Art 2 of 5 Nov 2003 Commission Decision that sets up CEBS. They respectively deal with convergence (‘The Committee shall contribute to the consistent application of Community directives and to the convergence of Member States' supervisory practices throughout the Community’) and the effectiveness of regulation lato sensu (the Committee ‘shall enhance supervisory cooperation, including the exchange of information on individual supervised institutions.’) Similarly, in the introductory part of CESR Charter, one reads that among the factors contributing to the decision to set up such committee there was also the awareness that […] close cooperation and information exchange between regulatory authorities are essential for the successful oversight of the European financial markets’; and that ‘[…] greater supervision and regulatory convergence’ are important ‘for the achievement of an integrated internal capital markets in Europe’. As it will be shown below in the text, the goal of strengthening the effectiveness of regulation is pursued not only through the cooperation and exchange of information between national authorities, but also through periodic assessments and comparisons of the various regulatory and supervisory national practices, with a view to establish and spread the best ones.

64 For example, in the implementation of the Basle II agreement and of the new EC Directive 2006/49/EC on capital requirements of banks and investment firms, one of the major challenges facing CEBS concerns the improvement of the cooperation between home State and host State authorities so as to make supervision of cross-border groups more effective and efficient.

65 The Lamfalussy Report (n 51) 41.

66 For a review of these arguments in the field of securities regulation, see Avgerinos, Y, ‘The need and the Rationale for a European Securities Regulator’ in Andenas, M and Avgerinos, Y (eds), Financial Markets in Europe: Towards a Single Regulator? (Kluwer Law International, The Hague, 2003) 145–82.Google Scholar

67 Lannoo, K (n 58) 505Google Scholar, rightly stresses the particular inadequacy of the ‘one-fits-all’ regulatory approach with regard to the less developed financial markets of the new EU Member States. As regards the need to match ‘regulatory infrastructure’ and ‘market conditions’ in the context of the single regulator discussion, see also Ferran, E (n 58) 121–2.Google Scholar

68 The expression ‘better regulation’ used here does not refer to the ‘better regulation’ policy recently adopted by the Commission. Unlike the Lamfalussy procedure, the latter policy is to be applied to all fields of European legislation, and not just to financial services. The Commission proposed a broad ‘Action Plan on simplifying and improving the regulatory environment’ (COM(2002) 278, 5 06 2002)Google Scholar, as part of the EU White Paper on Governance initiative (COM(2001) 428 final, 25 07 2001).Google Scholar The aim is to develop a new common ‘legislative culture’ in Europe by improving current procedures, widening the breadth of policy tools employed and simplifying existing legislation. This policy entails consultation, ex-ante and ex-post evaluation, and evidence-based policy-making. There will be detailed consultation and impact assessment prior to legislation. In addition, if any measures were found to be ineffective through ex-post evaluation, they would be re-valuated.

69 Some FSAP Directives go beyond the usual formula under which enforcement measures must be ‘effective, proportionate and dissuasive’ (eg Art 14 of the Directive 2003/6/EC on market abuse; and Art 28 of Directive 2004/109/EC on transparency [ OJ 2004 L390/38]).Google Scholar Specific obligations regarding the legal nature, powers and tools of supervisory authorities are laid down. See Arts 48 et seq of the MiFID. CERS has called on national governments to ensure its 25 EU Members have equal powers in terms of strength and scope, stating that: ‘Equivalent supervisory powers are a prerequisite for any kind of EU supervisory system to work’, Ecofin Meeting, 11 10 2005, available at <http://www.c-ebs.org/speeches/SP17.pdf>..>Google Scholar

70 On some of the possible techniques that can be used to render financial supervision more efficient in the EC context see Wymeersh, E, ‘The Future of Financial Regulation and Supervision in Europe’ (2005) 42 CMLR 987, 994–1009.Google Scholar

71 The Lamfalussy Report (n 51) 40.Google Scholar

72 It has been noted that, in addition to existing systems for consumer complaints about business practices, it is necessary to add systems for business and consumer complaints about practices of public authorities in the application of Community law in Member States. Market participants may be reticent in making public complaints about their regulators if they fear that to do so could damage relations and thus impact negatively on their business. See Inter-Institutional Monitoring Group, Third Report monitoring the Lamfalussy Process, 17 11 2004, 34.Google Scholar

73 The Lamfalussy Report (n 51) 40Google Scholar, acknowledged the important role of the private sector in bringing infringements to the attention of the Commission.

74 And they should remain, if one is to believe the benefits of regulatory competition, that is, the competition among rules of different legal systems. Regulatory competition can be defined as a process leading to the alteration of national regulation in response to the actual or potential impact of the mobility of economic factors such as goods, services, and other factors of production on national economic activity (see Sun, J-M and Pelkmans, J, ‘Regulatory Competition in the Single Market’ (1995) 3 Journal of Common Market Studies 67–89).CrossRefGoogle Scholar Regulatory competition is closely linked to mutual recognition, as the latter, by enhancing unrestricted cross-border mobility, facilitates the former.

75 It is sufficient to mention the subsidiarity principle (Art 5 EC) and the limits on the scope of EC harmonization action provided for by Art 47 (2) EC. See, on the latter, Moloney, N, ‘New Frontiers in EC Capital Markets Law: From Market Construction to Market Regulation’ (2003) 40 CMLR 809–43.Google Scholar