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About this book

This book examines the relationship between the EU investor protection regulations enshrined in MiFID and MiFID II and national contract and torts law. It describes how the effect of the conduct of business rules as implemented in national financial supervision legislation in private law extends to the issue of enforcement, and critically assesses this interaction from the perspective of EU law. In particular, the conclusions identified in the book will deepen readers’ understanding of the interplay between the conduct of business rules and private law norms governing a firm’s liability to pay damages, such as duty of care, attributability of damage, causation, contributory negligence and limitation. In turn, the book identifies the subordination and the complementarity model to conceptualise the interaction between the conduct of business rules and private law norms.

Moreover, the book challenges the view that civil courts are – or should be – forced to give private law effects to violation of the MiFID and MiFID II conduct of business rules in line with the subordination model. Instead, the complementarity model is advanced as the preferred approach to this interaction in view of what MiFID and MiFID II require from Member States in terms of their implementation, as well as the desirability of each model. This model presupposes that courts should consider the conduct of business rules when adjudicating individual disputes, while preserving the autonomy of private law norms governing liability of investment firms towards clients.

Based on analysis of case law of courts in Germany, the Netherlands and England & Wales, as well as scholarly literature, the book also compares the available causes of action, the conditions of liability and the obstacles investors face when claiming damages, as well as how and the extent to which investors can benefit from the conduct of business rules in clearing these obstacles. In so doing, under the approach adopted by national courts to the interplay between the conduct of business rules of EU origin and private law, the book shows how investors can benefit from the influence of these rules on private law norms. In closing, it demonstrates a hybridisation of private law remedies resulting from the accommodation of the conduct of business rules into the private law discourse according to the complementarity model, illustrating how judicial enforcement through private law means may contribute to investor protection.

Table of Contents

Frontmatter

Introduction

Frontmatter

Chapter 1. Introduction

Abstract
The chapter introduces the background of the study, focusing on mis-selling scandals which have demonstrated the vulnerability of consumers of investment products and the importance of their protection. In addition, the chapter describes how the study fits into the wider development of European regulatory private law and how the use by the EU legislator of the MiFID and MIFID II conduct of business rules for regulatory purposes gives rise to the need to investigate the relationship between these rules and national private law. Subsequently, the chapter introduces the aim of the study to investigate from an EU law and comparative law perspective how judicial enforcement of the MiFID and MiFID II conduct of business rules through private law means can contribute to retail investor protection. To this end, two main research questions are addressed in this book. The first is how can we conceptualise the interaction between the conduct of business rules and private law norms determining contractual or non-contractual (tort) liability of firms? The second question asks what gateways there are in national private law to the impact of the conduct of business rules on the firm’s liability to pay damages. Furthermore, the scope of the research and the terminology are explained. Lastly, the chapter outlines the structure of the research and how the parts of the book and chapters contribute to the book’s main argument.
Marnix Wallinga

MiFID and MiFID II and National Law

Frontmatter

Chapter 2. MiFID and MiFID II: The Development of EU Investor Protection Regulation

Abstract
This chapter focuses on the development and content of the EU investor protection regulation enshrined in the MiFID and MiFID II conduct of business rules. A closer look at the development of MiFID and MiFID II and at the context in which these developments have taken place offers an overview of the conduct of business rules and the objectives pursued at the EU level. The chapter discusses how EU regulation in the area of investor protection has evolved. First, the genesis of EU investor protection regulation is discussed, focusing on the Investment Services Directive, the forefather of MiFID. Subsequently, the chapter turns to MiFID, how it resulted from the European Commission’s Financial Services Action Plan, the Lamfalussy approach to regulation on which this regime is based and the transformation of the goal of investor protection from a mechanism instrumental to the overall goal of European capital markets integration into a self-standing regulatory objective. Afterwards, the chapter deals with MiFID II, how the financial crisis gave rise to the call for the recast of its predecessor, what changes were made to the regulatory design following the De Larosière Group Report and the intensification of the focus on investor protection. The chapter also describes where the conduct of business rules come from and how they have developed over different stages. Furthermore, the chapter provides a detailed account of what the MiFID and MiFID II risk information disclosure duty and suitability rule require from firms when providing investment advice to retail clients.
Marnix Wallinga

Chapter 3. MiFID and MiFID II Conduct of Business Rules and Their Relationship with Private Law: The EU Dimension

Abstract
This chapter analyses the tension between the MiFID and MiFID II conduct of business rules and national private law from the perspective of EU law. The chapter describes how this tension has been generated by the fact that MiFID and MiFID II have subjected conduct of business rules, which are similar in substance to the duties of care formulated in national private laws, to a regime of public supervision and administrative enforcement. The fact that the conduct of business rules also affect private law relationships by imposing standards of conduct on firms when they provide investment services to clients demonstrates the relevance of these rules for national private law. However, the fact that the conduct of business rules are cast as financial supervision standards and that MiFID and MiFID II remain silent with regard to judicial enforcement, makes it difficult to determine the effect of these rules in national private law. The potential effect of EU investor protection regulation in national private law is shown to extend to private law concepts which determine whether and, if so, to what extent investment firms can be required to compensate retail investors based on national contract and torts law. The chapter comprehensively explores two competing approaches to the interaction between the MiFID and MiFID II conduct of business and private law concepts governing a firm’s liability to pay—the subordination and the complementarity model—and advances the latter as the preferred approach.
Marnix Wallinga

Chapter 4. Implementation of the MiFID and MiFID II Conduct of Business Rules in the Member States

Abstract
This chapter investigates the implementation of EU investor protection regulation in the national legal systems of Germany, the Netherlands and the UK. The aim is to show how national legislators have designed the enforcement of the conduct of business rules in these legal systems. A closer look is taken at the financial supervision frameworks in which these rules have been transposed and how these frameworks have evolved. The chapter deals with the financial supervision and administrative enforcement regimes to which the conduct of business rules have been subjected, focusing on the authority responsible for enforcement and the available enforcement and sanctioning tools. Furthermore, the chapter examines the transposition of the MiFID and MiFID II information disclosure duty and suitability rule as well as the levels of (national) legislation over which the implementation has been spread out. In addition, the chapter explores how the relationship between the conduct of business rules and redress is shaped within national financial supervision frameworks. Discussed are the perceived nature of the conduct of business rules and whether the frameworks either confer a cause of action on investors or enable the responsible authority to ensure redress on behalf of investors. It is analysed why retail investors might still prefer to bring a damages action in common law despite the importance of the Financial Ombudsman Service and the ability of the Financial Conduct Authority to secure consumer redress. It is also shown why investors generally depend on national private law for redress in Germany and the Netherlands.
Marnix Wallinga

Judicial Enforcement of the Regulatory Conduct of Business Rules Through Liability to Compensate for Investment Losses

Frontmatter

Chapter 5. Contractual Liability

Abstract
This chapter deals with contractual liability. The chapter analyses the indirect effect which the MiFID and MiFID II conduct of business rules can have on a firm’s liability to pay damages in contract. Discussion of case law in Germany, the Netherlands and England & Wales shows that civil courts are adopting the complementarity approach to the interaction between the conduct of business rules and contractual liability. These courts generally dismiss the idea that financial conduct regulation of EU origin is exhaustive of the private law standard of care of firms. Breach of the conduct of business rules is not by itself regarded as giving rise to liability. As such, investors still largely depend on private law categories to provide the basis for redress and on private law norms to facilitate the effect of MiFID and MiFID II conduct of business rules on liability. At the same time, case law shows that civil courts recognise the indirect effect of the conduct of business rules by acknowledging that these rules influence the normative content of a firm’s duty of care in private law. The chapter analyses how this effect can allow investors to benefit from the detailed prescription by the conduct of business rules as to what behaviour is required from firms when providing investment advice. The way courts enforce the conduct of business rules through contractual liability, however, varies across the jurisdictions at issue. The differences in the extent to which courts allow the conduct of business rules to influence the standard of care in contract are analysed in detail. The chapter also discusses the obstacles to obtaining compensation on the basis of contractual liability, as well as ways for retail investors to clear these obstacles by making use of the MiFID and MiFID II conduct of business rules.
Marnix Wallinga

Chapter 6. Non-contractual Liability

Abstract
This chapter deals with non-contractual (tort) liability, which offers an underutilised avenue of judicial enforcement of the MiFID and MiFID II conduct of business rules. Non-contractual liability is shown to provide an advantage over contractual liability by offering a gateway not only to the indirect effect, but also to a more direct effect of the conduct of business rules on a firm’s liability to pay damages. The direct effect is grounded in a tort category which establishes liability for breach of a statutory duty. The direct effect presents a more straightforward way of claiming damages with regard to a breach of the conduct of business rules as it does not depend on the existence of a duty of care implied in contract or a general duty to act. The chapter analyses the avenues of judicial enforcement of the MiFID and MiFID II conduct of business rules through non-contractual liability available in German, Dutch and English law. Although these legal systems contain mechanisms that establish liability for breach of a statutory duty in either a civil code or financial supervision legislation, several obstacles can restrict the extent to which investors can benefit from direct effect of the conduct of business rules on private law. Investors might however be able to invoke the conduct of business rules, and the underlying investor protection aim, in line with the complementarity approach to the relationship between these rules and private law norms governing private law liability in order to overcome such obstacles to redress.
Marnix Wallinga

Chapter 7. Causation

Abstract
This chapter investigates the issue of causation, which presents one of the greatest challenges investors face when claiming damages in the context of the provision of investment services. Establishing the required causal link can prove difficult due to the fact that determining whether a particular action or event is the cause of a specific harmful result can often involve a great deal of uncertainty. The chapter analyses why this is particularly true for investment advisory relationships, where the investor’s decision forms an essential link between a firm’s breach of duty and the losses suffered. The chapter focuses on the difficulties investors can encounter in proving the existence of a factual causal link. Firms frequently argue that there is no condicio sine qua non relationship between the breach of duty for which they are held liable and the losses claimed because the client would have made the same investment decision had the firm provided adequate information or recommended a suitable transaction. Investors generally bear the burden to prove the existence of the condicio sine qua non relationship and, in practice, can experience significant difficulties in discharging this burden. Courts in some legal systems have improved the investor’s procedural position by applying several instruments. These instruments and how they alleviate the evidential difficulties are analysed for German, Dutch and English law. Furthermore, the chapter shows that under the complementarity model the MiFID and MiFID II conduct of business rules can in certain cases further strengthen the procedural position of investors in relation to factual causation.
Marnix Wallinga

Chapter 8. Remaining Factors: Limits on the Existence and Extent of Liability of Investment Firms to Compensate for Investment Losses

Abstract
This chapter analyses a number of remaining private law factors that can restrict the existence and the extent of liability to compensate for investment losses. In particular, the chapter analyses whether these factors raise significant obstacles to investors in obtaining redress and how investors might benefit from the MiFID and MiFID II conduct of business rules in clearing those obstacles. Analysed are the category of damage recoverable in contract or in tort, contributory negligence, limitation periods and the duty to protest. The chapters discusses how investors can recover not only investment losses suffered, but also potentially the profits they could have made if the firm had not acted in breach of a duty for which it is held liable. The chapter shows that German law offers a more straightforward way of compensating for investment losses, while investors could be entitled to a higher award of investment profits in Dutch and English law. The chapter also demonstrates that there is generally limited room to reduce the award of damages under contributory negligence on account of the investor’s dependency on the advice provided and the firm’s position of trust in investment advisory relationships. The chapter furthermore analyses how investors can escape the short general limitation period in English law by basing a claim for damages in the tort of negligence under the Latent Damages Act of 1986. In addition, particular attention is paid to the duty for investors to protest which exists alongside limitation periods in Dutch law.
Marnix Wallinga

Conclusion

Frontmatter

Chapter 9. Conclusion

Abstract
The conclusion synthesises the study’s main findings. The conceptualisation of the interaction between the MiFID and MiFID II conduct of business rules and private law norms determining a firm’s liability is discussed, as well as why this interaction should be guided by the complementarity model. In addition, the effect of the conduct of business rules on a firm’s liability under German, Dutch and English private law is compared. An analysis is made of the different manners and the varying degree to which these legal systems allow retail investors to invoke the conduct of business rules when bringing a claim for damages and benefit from these rules to clear obstacles to compensation. The conclusion demonstrates that the adoption by civil courts of the complementarity model has led to a hybridisation of private law remedies. Rather than avoiding the influence of the conduct of business rules, general contract and torts laws in the researched legal systems have shown the ability to accommodate EU investor protection regulation into the private law discourse. The hybridisation demonstrates not only the integration of EU investor protection regulation into national private law, but also the significant potential of enforcement by courts of the conduct of business rules through private law to contribute to investor protection. It allows courts to incorporate the conduct of business rules, and the underlying protective aim, within the decision whether to grant compensation on the basis of private law, which enables investors to benefit from the influence of these rules when claiming damages. At the same time, the analysis reveals differences in the extent to which investors harmed by breach of the conduct of business rules are actually able to successfully claim damages in national private law. The question which arises in this context is whether EU investor protection regulation should come to include a principle of civil liability in order to encourage and facilitate its private enforcement by aggrieved investors.
Marnix Wallinga
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