Chapter 1
Sources of European financial law
European Union statutes and their hierarchy
Treaties
Of the various EU legislative sources, those which carry the most weight are the treaties. It started
with one treaty, the Treaty of the European Economic Community (Treaty of Rome), signed in 1957. It
was originally signed by six countries: France, Germany, Italy, Belgium, Luxembourg and The
Netherlands. But now it counts 28 Member States. Later many more treaties followed. Most
significantly, the Maastricht Treaty (1992), which established the European Union replacing the
European Economic Community, while the Treaty of Lisbon (2007) resulted in a three-fold replacing
the Treaty of Rome. The three-fold being: The Treaty on European Union (TEU), the Treaty on the
Functioning of the European Union (TFEU) and the Charter of the Fundamental Rights of the
European Union.
Within the TFEU lie the four fundamental freedoms of the Union, to all intents and purposes mirroring
those initially established under the Treaty of Rome. The four fundamental freedoms being: free
movement of goods, free movement of persons, free movement of services and free movements of
capital. In the banking and financial sector, the last two are of particular significance. If a bank
established in one of the current 28 Member States wished to offer its banking services in another
Member State, it is permitted to do so, in light of the free movement of services principle and the body
of laws which, as a result of it, have been effectuated to render this concept practically applicable.
Likewise, the free movement of capital permits individuals and legal entities to freely export their
assets to another EU country, unhampered by any legal barriers.
A treaty provision is ‘directly applicable’. Which means that each individual in a Member State is
entitled to raise a claim before a national court requesting its application, specifically in cases where
the relevant national legislation contains a provision to the contrary. Simply put, treaty provisions take
precedence over national norms.
The treaties are the primary source of European Union Law, other statutes and decisions are of
‘secondary nature’. Such secondary legislation can be binding (regulations, directives and decisions)
or non-binding (recommendations and opinions). Binding legislation is adopted by the European
Union in order ‘to fulfil a specific function in the development of the Union law’, which simply means
that the legislation must demonstrate a legal basis and fall within the scope of the EU Treaties.
Regulations
A regulation is ‘binding in its entirety and directly applicable in all Member States’ (art. 288 TFEU). It
is self-executing, meaning that although domestic measure of implementing is sometimes required,
Member States are not permitted to enact any implementation in order to apply it. Accordingly, the
norms of each regulation are identical across the Member States.
1
, Directive
A directive is ‘binding, as to the result to be achieved, upon each Member State to which it is
addressed, but shall leave to the national authorities the choice of the form and methods’. Its
implementation is mandatory within each Member States and is bound by a strict time frame, although
the manner in which the specific norms are worded within the relevant domestic legislation is left to
the discretion of each EU country. As a general rule, directives are not directly enforceable, although
according to a line of case law of the European Union Court of Justice they can be when they are
sufficiently detailed.
Financial law legislation from Brussels
First Banking Directive
An early example of the formation of common rules applicable exclusively to credit institutions is the
‘First Banking Directive’, which originated in 1970s. This directive is no longer operational, but
specified that any banking activity ought to be preceded by communication of the relevant
authorisation from the competent authority, subsequent to the fulfilment of certain prerequisites. But it
was poorly forged as it failed to clarify the prerequisites and it maintained the obligation that
authorisation be granted not only by the home state, but also by each host EEC Member State where
the authorised bank wished to conduct its business.
Second Banking Directive
The flaws of the First Banking Directive were rectified by the Second Banking Directive. This time it
was better aligned with the principle that authorisation granted to a banking business in one Member
State will suffice and does not therefore require that the process be repeated in another. This principle
is commonly referred to as ‘passporting’.
Passporting
The notion of a ‘European passport’ is linked to ‘passported activities’. Such activities are detailed in a
list and termed the ‘activities subject to the mutual recognition’. The list can be found in Annex I of
Regulation No 573/2013; this regulation can be seen as a successor to the Second Banking Directive.
The main activities are the ‘acceptance of deposits or other repayable funds’ and the (l)ending
including, consumer credit, mortgage credit, factoring, with or without recourse, financing of
commercial transactions (including forfeiting).
The three pillars of the EU passport
The EU passport rests on three pillars. The first is the universal green light. Upon authorisation by the
relevant authority in its EU home Member State, this green light must also be deemed to sanction all
the passport activities that the financial institution wishes to perform in other Member States without
this requiring the further consent of a different supervisory authority in the ‘host countries’. Whereas
no additional consent may be required, the relevant host authorities must be notified. The universal
green light applies to cross-border, distant services or a branch office in the other Member State. The
green light does not apply to the activities of a subsidiary company established in another Member
State. The subsidiary company, as a separate legal entity, must apply for its own authorisation.
The second pillar concerns the increasing harmonisation of legislation regulating the banking industry,
thereby giving rise to a reduction in disparities among the relevant legislations. This is actually
relevant not just to the EU, but to the broader European Economic Area. Which comprises the 28 EU
2
Sources of European financial law
European Union statutes and their hierarchy
Treaties
Of the various EU legislative sources, those which carry the most weight are the treaties. It started
with one treaty, the Treaty of the European Economic Community (Treaty of Rome), signed in 1957. It
was originally signed by six countries: France, Germany, Italy, Belgium, Luxembourg and The
Netherlands. But now it counts 28 Member States. Later many more treaties followed. Most
significantly, the Maastricht Treaty (1992), which established the European Union replacing the
European Economic Community, while the Treaty of Lisbon (2007) resulted in a three-fold replacing
the Treaty of Rome. The three-fold being: The Treaty on European Union (TEU), the Treaty on the
Functioning of the European Union (TFEU) and the Charter of the Fundamental Rights of the
European Union.
Within the TFEU lie the four fundamental freedoms of the Union, to all intents and purposes mirroring
those initially established under the Treaty of Rome. The four fundamental freedoms being: free
movement of goods, free movement of persons, free movement of services and free movements of
capital. In the banking and financial sector, the last two are of particular significance. If a bank
established in one of the current 28 Member States wished to offer its banking services in another
Member State, it is permitted to do so, in light of the free movement of services principle and the body
of laws which, as a result of it, have been effectuated to render this concept practically applicable.
Likewise, the free movement of capital permits individuals and legal entities to freely export their
assets to another EU country, unhampered by any legal barriers.
A treaty provision is ‘directly applicable’. Which means that each individual in a Member State is
entitled to raise a claim before a national court requesting its application, specifically in cases where
the relevant national legislation contains a provision to the contrary. Simply put, treaty provisions take
precedence over national norms.
The treaties are the primary source of European Union Law, other statutes and decisions are of
‘secondary nature’. Such secondary legislation can be binding (regulations, directives and decisions)
or non-binding (recommendations and opinions). Binding legislation is adopted by the European
Union in order ‘to fulfil a specific function in the development of the Union law’, which simply means
that the legislation must demonstrate a legal basis and fall within the scope of the EU Treaties.
Regulations
A regulation is ‘binding in its entirety and directly applicable in all Member States’ (art. 288 TFEU). It
is self-executing, meaning that although domestic measure of implementing is sometimes required,
Member States are not permitted to enact any implementation in order to apply it. Accordingly, the
norms of each regulation are identical across the Member States.
1
, Directive
A directive is ‘binding, as to the result to be achieved, upon each Member State to which it is
addressed, but shall leave to the national authorities the choice of the form and methods’. Its
implementation is mandatory within each Member States and is bound by a strict time frame, although
the manner in which the specific norms are worded within the relevant domestic legislation is left to
the discretion of each EU country. As a general rule, directives are not directly enforceable, although
according to a line of case law of the European Union Court of Justice they can be when they are
sufficiently detailed.
Financial law legislation from Brussels
First Banking Directive
An early example of the formation of common rules applicable exclusively to credit institutions is the
‘First Banking Directive’, which originated in 1970s. This directive is no longer operational, but
specified that any banking activity ought to be preceded by communication of the relevant
authorisation from the competent authority, subsequent to the fulfilment of certain prerequisites. But it
was poorly forged as it failed to clarify the prerequisites and it maintained the obligation that
authorisation be granted not only by the home state, but also by each host EEC Member State where
the authorised bank wished to conduct its business.
Second Banking Directive
The flaws of the First Banking Directive were rectified by the Second Banking Directive. This time it
was better aligned with the principle that authorisation granted to a banking business in one Member
State will suffice and does not therefore require that the process be repeated in another. This principle
is commonly referred to as ‘passporting’.
Passporting
The notion of a ‘European passport’ is linked to ‘passported activities’. Such activities are detailed in a
list and termed the ‘activities subject to the mutual recognition’. The list can be found in Annex I of
Regulation No 573/2013; this regulation can be seen as a successor to the Second Banking Directive.
The main activities are the ‘acceptance of deposits or other repayable funds’ and the (l)ending
including, consumer credit, mortgage credit, factoring, with or without recourse, financing of
commercial transactions (including forfeiting).
The three pillars of the EU passport
The EU passport rests on three pillars. The first is the universal green light. Upon authorisation by the
relevant authority in its EU home Member State, this green light must also be deemed to sanction all
the passport activities that the financial institution wishes to perform in other Member States without
this requiring the further consent of a different supervisory authority in the ‘host countries’. Whereas
no additional consent may be required, the relevant host authorities must be notified. The universal
green light applies to cross-border, distant services or a branch office in the other Member State. The
green light does not apply to the activities of a subsidiary company established in another Member
State. The subsidiary company, as a separate legal entity, must apply for its own authorisation.
The second pillar concerns the increasing harmonisation of legislation regulating the banking industry,
thereby giving rise to a reduction in disparities among the relevant legislations. This is actually
relevant not just to the EU, but to the broader European Economic Area. Which comprises the 28 EU
2
