HASTINGS INTERNATIONAL
AND COMPARATIVE LAW Review
Volume 40, No. 1 — WINTER 2017
Articles
The Future of Transnational Self-Regulation – Enforcement and
Compliance in Professional Services....................................Panagiotis Delimatsis
Schedding Light on EU Financial Regulators: A Sociological
and Physchological Perspective ...........................................Giuliano G. Castellano
and Geneviève Helleringer
Challenges and Opportunities of the China-Gulf
Cooperation Council Free Trade Agreement ......................... Gonzalo Villalta Puig
and Alice Tung Ho Yee
Note
Background Checks and Employment Discrimination:
Distant parallels between U.S. and EU Privacy Regimes ..................... Eugene Frid
UNIVERSITY OF CALIFORNIA
Hastings College of the Law
HASTINGS INTERNATIONAL AND
COMPARATIVE LAW Review
VOL. 40
WINTER 2017
NO. 1
EDITORIAL BOARD
(2016-2017)
ARIANE A. MOTA
Editor-in-Chief
ELIANA CORONA
KATHARINA ØSTERGAARD
DENISE NGO
MICHELLE HERNANEZ
Productions Editors
Submissions Editors
MARY ARIASAIF
XIAN ZHENG
EMILY CLARKE
Executive Editors
LORI KOMSHIAN
Notes Editor
REBECCA SHUMAN
ENYA CHANG
GOLZAR ANSARI-SHAHRI
Articles Editors
GABRIELLE PARRIS
Symposium Editor
NITIN SAPRA
CIERRA ROGSTAD
NATHALIE KOCH
Production Assistant Editors
EUGENE FRID
ZOHRA SIDDIQ
Senior Operations Editor
Technical Editor
STAFF EDITORS
ALLISON ADEY
JUSTIN P. CAMPELL
IAN A. BARBER
SID SINGH
TAO YU
KATLYN AGUILAR
TOM MCCARTHY
Scholarly Publications Director
Hastings International and
Comparative Law Review
UNIVERSITY OF CALIFORNIA
•
H A ST I N G S C O L L E G E O F T H E L A W
Published two times a year by the students of the
University of California, Hastings College of the Law.
Hastings International and Comparative Law Review (ISSN 0149-9246) is
published in Winter and Summer annually.
Published exclusively online beginning with Volume 40.
Single issues and previous volumes are available from the Law Review at $50.00
per copy (US$50.00 foreign): [email protected]. Business and editorial
mailing address: 200 McAllister Street, San Francisco, CA 94102-4978.
Editorial office located at 100 McAllister Street
[email protected].
http://www.uchastings.edu/hiclr/index.html.
Citations generally conform to The Bluebook, A Uniform System of Citation
(20th ed., 2015), copyright by the Columbia, Harvard, and University of
Pennsylvania law reviews and Yale Law Journal.
The Law Review gladly considers unsolicited manuscripts and short commentaries
on recent legaldevelopments for publication. The Law Review generally does
not publish manuscripts from law students other than students of Hastings
College of the Law. Manuscripts should be double or triplespaced and
typewritten on 8.5” × 11” files, with all footnotes at the end of the manuscript.
The manuscript shouldbe accompanied by a resume.
Copyright 2017 UC Hastings College of the Law
Hastings Faculty Advisors
Richard A. Boswell, Associate Dean for Global Programs and Professor of Law
Ugo Mattei, Fromm Chair in International and Comparative Law
Harry G. Prince, Professor of Law
Joel R. Paul, Professor of Law
Naomi Roht-Arriazza, Professor of Law
HASTINGS COLLEGE OF THE LAW
DIRECTORS
THOMAS GEDE, B.A., J.D., Chair ......................................................................................................... Davis
CARL W. “CHIP” ROBERTSON, B.A., M.B.A., J.D., Vice Chair ................................................... Los Angeles
DONALD BRADLEY, B.A., J.D., LL.M. .......................................................................................... Pleasanton
TINA COMBS, B.A., J.D. .................................................................................................................. Oakland
MAUREEN E. CORCORAN , B.A., M.A., J.D. ............................................................................ San Francisco
MARCI DRAGUN, B.A., J.D. ........................................................................................................ Burlingame
CARIN T. FUJISAKI, B.A., J.D. ................................................................................................... Walnut Creek
CLAES H. LEWENHAUPT, B.A., LL.M., J.D.* .................................................................................. Fort Irwin
MARY NOEL PEPYS, B.A., J.D. .............................................................................................. San Francisco
BRUCE L. SIMON, A.B., J.D. ...................................................................................................... Hillsborough
SANDI THOMPSON, B.A., J.D. ........................................................................................................... Woodside
*Great-grandson of Hon. Serranus Clinton Hastings, Founder of Hastings College of the Law
DIRECTORS EMERITI
MARVIN R. BAXTER, B.A., J.D. ........................................................................................................... Fresno
WILLIAM R. CHANNELL, B.A., J.D., Retired Justice ......................................................................... Lafayette
JOSEPH W. COTCHETT, B.S., LL.B. ............................................................................................. Hillsborough
MYRON E. ETIENNE, JR., B.S., J.D. .................................................................................................................
LOIS HAIGHT HERRINGTON, A.B., J.D. ........................................................................................ Walnut Creek
MAX K. JAMISON, B.A., J.D. ..........................................................................................................................
JOHN T. KNOX, A.B., J.D. ............................................................................................................ Richmond
JAMES E. MAHONEY, B.A., J.D. ................................................................................................... Los Angeles
BRIAN D. MONAGHAN, B.S., J.D. ................................................................................................... San Diego
CHARLENE PADOVANI MITCHELL, B.A., M.A., J.D. ................................................................... San Francisco
JOHN A. SPROUL, A.B., J.D. ............................................................................................................. El Cerrito
ADMINISTRATION AND INSTRUCTION
DAVID L. FAIGMAN, B.A., M.A., J.D. ............................................................ INTERIM Chancellor and Dean
and John F. Digardi Distinguished Professor of Law
EVAN TSEN LEE, A.B., J.D. ......................... INTERIM Provost and Academic Dean, and Professor of Law
JEFFREY A. LEFSTIN, Sc.B., J.D., Ph.D. .......................... Associate Academic Dean and Professor of Law
ELISE K. TRAYNUM, B.A., J.D. ....................... General Counsel and Secretary of the Board of Directors
DAVID SEWARD, B.A., M.B.A. ................................................................................. Chief Financial Officer
GINA BARNETT, B.A., M.A.. ................................................... Registrar, Director of Institutional Research
DEBORAH TRAN, B.A., M.A. ......................................................................................................... Controller
RICHARD A. BOSWELL, B.A., J.D. ................ Associate Dean for Global Programs and Professor of Law
SCOTT DODSON, B.A., J.D. ......................................... Associate Dean for Research and Professor of Law
MORRIS RATNER, B.A., J.D. .............................. Associate Dean for Academic and Professional Success,
and Professor of Law
ASCANIO PIOMELLI, A.B., J.D. ......................................... Associate Dean for Experiential Learning and
Clinical Professor of Law
RUPA BHANDARI, J.D.. ........................................................................... Assistant Dean of Student Services
TONI YOUNG, B.A., J.D. .......................... Assistant Dean of Legal Research & Writing, and Moot Court
SARI ZIMMERMAN, B.S.F.S., J.D. .............................................. Assistant Dean for the Office of Career and
Professional Development
VICTOR HO ........................................................................................................... Director of Financial Aid
ROBIN FELDMAN, B.A., J.D. ............... Director of the Law and Bioscience Project and Professor of Law
MIYE GOISHI, B.A., J.D. ..................... Director of the Civil Justice Clinic and Clinical Professor of Law
JAN JEMISON, B.S., M.B.A., J.D. ........................ Director of the Legal Education Opportunity Program
and Adjunct Assistant Professor of Law
JAIME KING, B.A., J.D., Ph.D. ......................................... Director of UCSF/UC Hastings Consortium on
Law, Science & Health Policy
TOM MCCARTHY, B.A., M.A. ............................................................... Director of Scholarly Publications
KAREN B. MUSALO, B.A., J.D. .......................... Director of the Center for Gender and Refugee Studies,
and Director of the Refugee and Human Rights Clinic, and Clinical Professor of Law
LISA NOSHAY PETRO, B.P.S., J.D. ......................................... Director of the Disability Resource Program
ROBERT S. PETTIT ..........................................................................Executive Director of Human Resources
SHEILA R. PURCELL, B.A., J.D. ............... Director of the Center for Negotiation and Dispute Resolution,
and Clinical Professor of Law
ALEX A. G. SHAPIRO, M.F.A. ....................................................................... Director of Exernal Relations
CAMILLA TUBBS, M.A., J.D., M.L.I.S. ................................. Associate Dean for Library and Technology
JOAN C. WILLIAMS, B.A., M.C.P., J.D. ....................................................... Distinguished Professor of Law
and Director of the Center for Worklife Law
LAURIE ZIMET, B.A., J.D. ..................................................... Director of the Academic Support Program
PROFESSORS EMERITI OF LAW
MARK N. AARONSON, A.B., M.A., J.D., PH.D. ................................................. Professor of Law, Emeritus
MARGRETH BARRETT, B.A., M.A., J.D. .............................................................. Professor of Law, Emeritus
GAIL BOREMAN BIRD, A.B., J.D. ......................................................................... Professor of Law, Emeritus
GEORGE E. BISHARAT, A.B., M.A., PH.D., J.D. .................................................. Professor of Law, Emeritus
MARSHA N. COHEN, B.A., J.D. ............................ Hon. Raymond L. Sullivan Professor of Law, Emeritus
RICHARD B. CUNNINGHAM, B.S., J.D., LL.M. ..................................................... Professor of Law, Emeritus
BRIAN GRAY, B.A., J.D. ..................................................................................... Professor of Law, Emeritus
JOSEPH GRODIN, B.A., J.D., PH.D. ..................................................................... Professor of Law, Emeritus
GEOFFREY C. HAZARD, JR., B.A., LL.B. ...... Thomas E. Miller Distinguished Professor of Law, Emeritus
WILLIAM T. HUTTON, A.B., J.D., LL.M. ............................................................ Professor of Law, Emeritus
DAVID J. JUNG, A.B., J.D. .................................................................................. Professor of Law, Emeritus
MARY KAY KANE, A.B., J.D. .............................................................. Emerita Dean and Chancellor, and
Distinguished Professor of Law, Emeritus
CHARLES L. KNAPP, B.A., J.D. ........................................................................... Professor of Law, Emeritus
FREDERICK LAMBERT, A.B., J.D. ......................................................................... Professor of Law, Emeritus
JOHN LESHY, A.B., J.D. ............................................................. Professor of Real Property Law, Emeritus
DAVID I. LEVINE, A.B., J.D. ............................................................................... Professor of Law, Emeritus
STEPHEN A. LIND, A.B., J.D., LL.M. ................................................................. Professor of Law, Emeritus
JOHN MALONE, B.S., LL.B. .................................................................................. Lecturer in Law, Emeritus
SHAUNA I. MARSHALL, A.B., J.D., J.S.M. ........................................................... Professor of Law, Emeritus
CALVIN R. MASSEY, A.B., M.B.A., J.D. ............................................................. Professor of Law, Emeritus
JAMES R. MCCALL, B.A., J.D. ........................................................................... Professor of Law, Emeritus
BEATRICE MOULTON, J.D., LL.M. ....................................................................... Professor of Law, Emeritus
MELISSA LEE NELKEN, B.A., M.A., J.D. ............................................................. Professor of Law, Emeritus
JENNI PARRISH, B.A., M.L.S., J.D. .................................................................... Professor of Law, Emeritus
STEPHEN SCHWARZ, A.B., J.D. ............................................................................. Professor of Law, Emeritus
HON. WILLIAM W. SCHWARZER, A.B., LL.B. ....................................................... Professor of Law, Emeritus
KEVIN H. TIERNEY, A.B., M.A., LL.B., LL.M. ................................................. Professor of Law, Emeritus
GORDON VAN KESSEL, A.B., LL.B. ..................................................................... Professor of Law, Emeritus
WILLIAM K. S. WANG, B.A., J.D. ...................................................................... Professor of Law, Emeritus
C. KEITH WINGATE, B.S., J.D. ............................................................................ Professor of Law, Emeritus
PROFESSORS OF LAW
DREW AMERSON ...................................................................................................... Visiting Professor of Law
ALICE ARMITAGE, A.B., M.A., J.D. .................................................................... Associate Professor of Law
HADAR AVIRAM , LL.B., M.A., J.D. .................................................................................... Professor of Law
ALINA BALL, J.D., LL.M. .................................................................................. Associate Professor of Law
DANA BELDIMAN, M.A., J.D., LL.M. ....................................................................... Professor in Residence
KATE BLOCH, B.A., M.A., J.D. .......................................................................................... Professor of Law
STEVEN BONORRIS, A.B., J.D. ................................................................................................. Lecturer in Law
RICHARD A. BOSWELL, B.A., J.D. ............................ Associate Academic Dean for Global Programs and
Professor of Law
ABRAHAM CABLE, B.A., J.D. ............................................................................. Associate Professor of Law
JO CARRILLO, B.A., J.D., J.S.D. .......................................................................................... Professor of Law
PAOLO CECCHI DIMEGLIO, J.D., LL.M., MAGISTÉRE-DJCE, PH.D. .................. Permanent Affiliated Scholar
JOHN CRAWFORD, B.A., M.A., J.D. .................................................................... Associate Professor of Law
R. GREGORY COCHRAN, B.A., M.D., J.D. .............. Associate Director, UCSF/UC Hastings Health Policy
and Law Degree Program, and Lecturer in Law
BEN DEPOORTER, M.A., J.D., PH.D., J.S.D., LL.M. .......................................................... Professor of Law
JOHN L. DIAMOND, B.A., J.D. ............................................................................................. Professor of Law
REZA DBADJ, J.D. .................................................................................................. Visiting Professor of Law
SCOTT DODSON, B.A., J.D. .................................................................................................. Professor of Law
VEENA DUBAL Ph.D., J.D. ................................................................................. Associate Professor of Law
JENNIFER TEMPLETON DUNN, B.A., J.D. ................................................................................... Lecturer in Law
JARED ELLIAS, A.B., J.D. .................................................................................... Associate Professor of Law
DAVID L. FAIGMAN, B.A., M.A., J.D. ........................................................... INTERIM Chancellor and Dean
and John F. Digardi Distinguished Professor of Law
LISA FAIGMAN, B.S., J.D. ...................................................................................................... Lecturer in Law
ROBIN FELDMAN, B.A., J.D. ............... Director of the Law and Bioscience Project and Professor of Law
HEATHER FIELD, B.S., J.D. ................................................................................................... Professor of Law
CLARK FRESHMAN, B.A., M.A., J.D. ................................................................................... Professor of Law
AHMED GHAPPOUR, J.D. .......................................................................... Visiting Assistant Professor of Law
BRITTANY GLIDDEN, B.A., J.D. .............................................................. Associate Clinical Professor of Law
MIYE GOISHI, B.A., J.D. ..................... Clinical Professor of Law and Director of the Civil Justice Clinic
KEITH J. HAND, B.A., M.A., J.D. ...................................................................... Associate Professor of Law
CAROL IZUMI .......................................................................................................... Clinical Professor of Law
PETER KAMMINGA, LL.B., J.D., LL.M., PH.D. .............................................. Permanent Affiliated Scholar
PETER KEANE ......................................................................................................... Visiting Professor of Law
CHIMENE KEITNER, A.B., D.PHIL., J.D. ................................................................................. Professor of Law
JAIME KING, B.A., J.D., Ph.D. ......................................... Director of UCSF/UC Hastings Consortium on
Law, Science & Health Policy, and Professor of Law
HERBERT LAZEROW, J.D. .................................................................................................... Affiliated Scholar
EUMI K. LEE, B.A., J.D. ...................................................................................... Clinical Professor of Law
EVAN TSEN LEE, A.B., J.D. ......................... INTERIM Provost and Academic Dean, and Professor of Law
JEFFREY A. LEFSTIN, Sc.B., J.D., Ph.D. .......................... Associate Academic Dean and Professor of Law
RORY K. LITTLE, B.A., J.D. ................................................................................................ Professor of Law
CHRISTIAN E. MAMMEN, J.D. .................................................................................................. Lecturer in Law
RICHARD MARCUS, B.A., J.D. .......................................... Horace O. Coil (’57) Chair in Litigation and
Distinguished Professor of Law
LEO P. MARTINEZ, B.S., M.S., J.D. ....................................................... Albert Abramson Professor of Law
UGO MATTEI, J.D., LL.M. .... Alfred and Hanna Fromm Chair in International and Comparative Law
and Distinguished Professor of Law
SETSUO MIYAZAWA, M.A., M.PHIL., PH.D., LL.B., LL.M., J.S.D. ..........................Senior Professor of Law
STEFANO MOSCATO, B.A., J.D. ............................................................................................... Lecturer in Law
KAREN B. MUSALO, B.A., J.D. .......................... Director of the Center for Gender and Refugee Studies,
and Director of the Refugee and Human Rights Clinic, and Professor of Law
OSAGIE K. OBASOGIE, B.A., J.D., PH.D. ............................................................................. Professor of Law
DAVE OWEN, B.A., J.D. ......................................................................................... Visiting Professor of Law
ROGER C. PARK, A.B., J.D. ................................................. James Edgar Hervey Chair in Litigation and
Distinguished Professor of Law
JOEL PAUL, B.A., M.A.L.D., J.D. ..................................................................................... Professor of Law
ASCANIO PIOMELLI, A.B., J.D. ......................................... Associate Dean for Experiential Learning and
Clinical Professor of Law
ZACHARY PRICE, J.D. ............................................................................. Visiting Assistant Professor of Law
HARRY G. PRINCE, B.A., J.D. ............................................................................................. Professor of Law
SHEILA R. PURCELL, B.A., J.D. ............... Director of the Center for Negotiation and Dispute Resolution,
and Clinical Professor of Law
RADHIKA RAO, A.B., J.D. .................................................................................................... Professor of Law
AARON RAPPAPORT, B.A., J.D. ............................................................................................. Professor of Law
MORRIS RATNER, B.A., J.D. ............................................................................... Associate Professor of Law
TRACEY ROBERTS, A.B., J.D., LL.M. .................................................................... Visiting Professor of Law
DORIT RUBENSTEIN REISS, LL.B., PH.D. ............................................................................... Professor of Law
NAOMI ROHT-ARRIAZA, B.A., J.D., M.P.P. .......................................................................... Professor of Law
MICHAEL B. SALERNO, J.D. ..................................................................................... Clinical Professor of Law
and Associate Director of the Center for State and Local Government Law
REUEL SCHILLER, B.A., J.D., PH.D. ............................ Associate Dean for Research and Professor of Law
LOIS W. SCHWARTZ, B.A., M.A., M.L.S., J.D. ........................................................ Senior Lecturer in Law
ROBERT SCHWARTZ, B.A., J.D. ................................................................................ Visiting Professor of Law
ALFRED C. SERVER, M.D., PH.D. ...................................................................................... Affiliated Scholar
JODI SHORT, B.A., J.D., PH.D. ........................................................................... Associate Professor of Law
GAIL SILVERSTEIN, B.A., J.D. .................................................................................. Clinical Professor of Law
JOANNE SPEERS, J.D., M.P.P. ........................................................................................... Affiliated Scholar
MAI LINH S PENCER, B.A., J.D. ......................................................... Visiting Clinical Professor of Law and
Academic Director of Lawyers for America
JOHN SYLVESTER, J.D. .............................................................................................. Visiting Professor of Law
DAVID TAKACS, B.S., M.A., J.D., LL.M., PH.D. .............................................. Associate Professor of Law
YVONNE TROYA, B.A., J.D. .................................................................................. Clinical Professor of Law
JOANNA K. WEINBERG, J.D., LL.M. .................................................................................. Affiliated Scholar
MANOJ VISWANATHAN, S.B., S.M., J.D., LL.M. ............................................ Associate Professor Designate
D. KELLY WEISBERG, B.A., M.A., PH.D., J.D. ................................................................... Professor of Law
LOIS WEITHORN, PH.D., J.D. ............................................................................................... Professor of Law
JOAN C. WILLIAMS, B.A., M.C.P., J.D. ...................................................... Distinguished Professor of Law,
UC Hastings Foundation Chair and Director of the Center for Worklife Law
FRANK H. WU ............................................................................................Distinguished Professor of Law
TONI YOUNG, B.A., J.D. ........................... Assistant Dean of Legal Research & Writing and Moot Court
MICHAEL ZAMPERINI, A.B., J.D. .............................................................................. Visiting Professor of Law
LAURIE ZIMET, B.A., J.D. ..................................................... Director of the Academic Support Program
RICHARD ZITRIN, A.B., J.D. ................................................................................................... Lecturer in Law
ADJUNCT FACULTY
GARY ALEXANDER, J.D. ........................................................................................ Assistant Professor of Law
ROY BARTLETT, J.D. ............................................................................................ Assistant Professor of Law
MARK BAUDLER, J.D. .......................................................................................... Assistant Professor of Law
BRANDON BAUM, B.A., J.D. ................................................................................ Assistant Professor of Law
KARENJOT BHANGOO RANDHAWA, J.D. .................................................................... Assistant Professor of Law
JAMES BIRKELUND, J.D. ........................................................................................ Assistant Professor of Law
CORY BIRNBERG, B.A., J.D. ................................................................................. Assistant Professor of Law
DANIEL BLANK, J.D. ............................................................................................ Assistant Professor of Law
YISHAI BOYARIN, J.D. .......................................................................................... Assistant Professor of Law
DARSHAN BRACH, J.D. ......................................................................................... Assistant Professor of Law
CHARLES R. BREYER, J.D. .................................................................................... Assistant Professor of Law
JOHN BRISCOE, J.D. ............................................................................................. Assistant Professor of Law
JILL BRONFMAN, B.A., M.A., J.D. ................... Program Director of the Privacy and Technology Project
at the Institute for Innovation Law and Adjunct Professor of Law in Data Privacy
DANIEL BROWNSTONE, J.D. ................................................................................... Assistant Professor of Law
EMILY BURNS, J.D. .............................................................................................. Assistant Professor of Law
MICHAEL CARBONE, J.D. ..................................................................................... Assistant Professor of Law
KAREN CARRERA, J.D. ......................................................................................... Assistant Professor of Law
CARL W. CHAMBERLIN, A.B., J.D. ......................................................................... Assistant Professor of Law
ANDREW Y. S. CHENG, B.A., J.D. ........................................................................ Assistant Professor of Law
HENRY CHENG, J.D. ............................................................................................. Assistant Professor of Law
KARL CHRISTIANSEN , J.D. ..................................................................................... Assistant Professor of Law
RICHARD COHEN, B.A., J.D. ................................................................................ Assistant Professor of Law
PAMELA COLE, J.D. ............................................................................................. Assistant Professor of Law
MATTHEW COLES, J.D. ......................................................................................... Assistant Professor of Law
JAMES CORBELLI ................................................................................................... Assistant Professor of Law
MARGARET CORRIGAN, J.D. .................................................................................. Assistant Professor of Law
PAUL CORT, J.D. ................................................................................................. Assistant Professor of Law
JAMES CREIGHTON, J.D. ........................................................................................ Assistant Professor of Law
MARK D’ARGENIO , B.A., J.D. ............................................................................ Assistant Professor of Law
PATRICIA DAVIDSON ............................................................................................... Assistant Professor of Law
JOHN DEAN, J.D. ................................................................................................. Assistant Professor of Law
SHASHIKALA DEB, J.D. ......................................................................................... Assistant Professor of Law
BURK DELVENTHAL, J.D. ....................................................................................... Assistant Professor of Law
LOTHAR DETERMANN, J.D. .................................................................................... Assistant Professor of Law
TERRY KAY DIGGS, B.A., J.D. ............................................................................ Assistant Professor of Law
JAMES R. DILLON, J.D., PH.D. ............................................................................. Assistant Professor of Law
ROBERT DOBBINS, J.D., LL.M. ........................................................................... Assistant Professor of Law
TOM DULEY, J.D. ................................................................................................ Assistant Professor of Law
JAMES B. ELLIS, B.S., J.D. ................................................................................... Assistant Professor of Law
RANDALL S. FARRIMOND, B.S., M.S., J.D. ............................................................ Assistant Professor of Law
TAMARA FISHER, J.D. .......................................................................................... Assistant Professor of Law
JOHN FORD, J.D. .................................................................................................. Assistant Professor of Law
ROBERT FRIES, B.A., J.D. .................................................................................... Assistant Professor of Law
MICHAEL GAITLEY, J.D. ........................................................................................ Assistant Professor of Law
STACEY GEIS ......................................................................................................... Assistant Professor of Law
MICHAEL GOWE, J.D. ........................................................................................... Assistant Professor of Law
JOSEPH GRATZ, J.D. .............................................................................................. Assistant Professor of Law
CHARLES TAIT GRAVES, J.D. ................................................................................. Assistant Professor of Law
RICHARD GROSBOLL, J.D. ..................................................................................... Assistant Professor of Law
JONATHAN GROSS, J.D. ......................................................................................... Assistant Professor of Law
PAUL GROSSMAN, J.D. ......................................................................................... Assistant Professor of Law
THEDA HABER, B.A., M.A., J.D. ....................................................................... Assistant Professor of Law
GEOFFREY A. HANSEN, B.A., J.D. ........................................................................ Assistant Professor of Law
HILARY HARDCASTLE, B.A., J.D., M.L.I.S. ......................................................... Assistant Professor of Law
DIANA HARDY, B.A., J.D. ................................................................................... Assistant Professor of Law
SARA HARRINGTON, J.D. ....................................................................................... Assistant Professor of Law
STEVE HARRIS ...................................................................................................... Assistant Professor of Law
SARAH HAWKINS, B.A., J.D. ................................................................................ Assistant Professor of Law
HOWARD A. HERMAN, A.B., J.D. ......................................................................... Assistant Professor of Law
DENNIS HIGA, B.A., J.D. .................................................................................... Assistant Professor of Law
MONICA HOFMANN, J.D. ...................................................................................... Assistant Professor of Law
SARAH HOOPER J.D. ............................................................................................. Assistant Professor of Law
ROBERT HULSE, B.S., M.S., J.D. ......................................................................... Assistant Professor of Law
TERI L. JACKSON, B.A., J.D. .............................................................................. Assistant Professor of Law
MORRIS JACOBSON, B.A., J.D. ............................................................................. Assistant Professor of Law
OKSANA JAFFE, B.A., M.A., J.D., LL.M. ........................................................... Assistant Professor of Law
PEEYUSH JAIN, B.A., J.D. .................................................................................... Assistant Professor of Law
MARIA-ELENA JAMES, B.A., J.D. ......................................................................... Assistant Professor of Law
JULIA MEZHINSKY JAYNE, J.D. ................................................................................ Assistant Professor of Law
JAN JEMISON, B.S., M.B.A., J.D. ........................ Director of the Legal Education Opportunity Program
and Adjunct Assistant Professor of Law
STEPHEN JOHNSON, J.D. ......................................................................................... Assistant Professor of Law
ORI KATZ, B.A., J.D. ......................................................................................... Assistant Professor of Law
S. MICHAEL KERNAN, J.D. ................................................................................... Assistant Professor of Law
TAL KLEMENT, B.A., J.D., M.PP. ....................................................................... Assistant Professor of Law
ARLENE KOSTANT, B.A., M.A., J.D. .................................................................... Assistant Professor of Law
DAVID KOSTINER, B.A., J.D. ................................................................................ Assistant Professor of Law
MANISH KUMAR ................................................................................................... Assistant Professor of Law
WILLIAM LAFFERTY, J.D. ...................................................................................... Assistant Professor of Law
CAROL M. LANGFORD, J.D. ................................................................................. Assistant Professor of Law
CLIFFORD T. LEE, J.D. ......................................................................................... Assistant Professor of Law
JONATHAN U. LEE, J.D. ........................................................................................ Assistant Professor of Law
R. ELAINE LEITNER, B.S., J.D. ............................................................................. Assistant Professor of Law
GARY LEWIS, B.SC., J.D. .................................................................................... Assistant Professor of Law
STEPHEN LIACOURAS, B.A., J.D. ........................................................................... Assistant Professor of Law
FRANK LIND, J.D. ................................................................................................ Assistant Professor of Law
ELIZABETH LINK, J.D. .......................................................................................... Assistant Professor of Law
EUGENE LITVINOFF, J.D. ....................................................................................... Assistant Professor of Law
ALLISON MACBETH, B.A., J.D. ............................................................................ Assistant Professor of Law
CECILY MAK, J.D. ............................................................................................... Assistant Professor of Law
CHRISTIAN E. MAMMEN, J.D., PH.D. .................................................................... Assistant Professor of Law
HARRY MARING, B.A., J.D. ................................................................................. Assistant Professor of Law
ALEXIIUS MARKWALDER, J.D. ................................................................................ Assistant Professor of Law
JACK MCCOWAN, J.D. ......................................................................................... Assistant Professor of Law
MARY MCLAIN, J.D. .......................................................................................... Assistant Professor of Law
JOANNE MEDERO, B.A., J.D. ................................................................................ Assistant Professor of Law
JASON MEEK, J.D. ............................................................................................... Assistant Professor of Law
ALAN MELINCOE, J.D. .......................................................................................... Assistant Professor of Law
SAMUEL R. MILLER, J.D. ...................................................................................... Assistant Professor of Law
THERESA DRISCOLL MOORE, B.A., J.D. ................................................................ Assistant Professor of Law
JESSICA NOTINI, B.A., J.D. ................................................................................... Assistant Professor of Law
DANIELLE OCHS, B.A., J.D. ................................................................................. Assistant Professor of Law
MARI OVERBECK, B.A., J.D. ............................................................................... Assistant Professor of Law
ROGER PATTON, B.S., J.D. ................................................................................... Assistant Professor of Law
RICHARD PEARL, B.A., J.D. ................................................................................. Assistant Professor of Law
JAMES PISTORINO, J.D. ......................................................................................... Assistant
RACHEL PROFFITT, J.D. ......................................................................................... Assistant
ERIC QUANDT, J.D. .............................................................................................. Assistant
CHARLES RAGAN, J.D. .......................................................................................... Assistant
ROBIN REASONER, J.D. ......................................................................................... Assistant
JENNIFER A. REISCH, B.A., J.D. ........................................................................... Assistant
CHRISTOPHER RIES, B.S., J.D. ............................................................................... Assistant
HON. A. JAMES ROBERTSON, J.D. .......................................................................... Assistant
KEVIN ROMANO, J.D. ........................................................................................... Assistant
DAVID ROSENFELD , B.A., J.D. .............................................................................. Assistant
KATHRYN ROSS, B.A., J.D. .................................................................................. Assistant
ROBERT RUBIN, J.D. ............................................................................................ Assistant
DOUGLAS SAELTZER, J.D. ...................................................................................... Assistant
ROBERT SAMMIS, B.A., J.D. ................................................................................. Assistant
JOACHIM SCHERER ................................................................................................. Assistant
JONATHAN SCHMIDT, J.D. ....................................................................................... Assistant
JAMES SCHURZ, J.D. ............................................................................................. Assistant
NINA SEGRE, J.D. ................................................................................................ Assistant
BAHRAM SEYEDIN-NOOR, J.D. ............................................................................... Assistant
ROCHELLE SHAPELL, B.A., M.P.H., J.D. ............................................................... Assistant
ANN SHULMAN, B.S., J.D., LL.M. ....................................................................... Assistant
ERIC SIBBITT, A.B., J.D., LL.M. ......................................................................... Assistant
LARRY SIEGEL, M.A., J.D. .................................................................................. Assistant
JEFFREY SINSHEIMER, A.B., J.D. ............................................................................ Assistant
ROCHAEL SOPER, J.D., LL.M. .............................................................................. Assistant
MATTHEW SOTOROSEN, J.D. ................................................................................... Assistant
MARK SPOLYAR, B.S.E., J.D. ............................................................................... Assistant
THOMAS E. STEVENS, B.A., J.D. .......................................................................... Assistant
AURIA STYLES, J.D. ............................................................................................. Assistant
KIM SWAIN, J.D. .................................................................................................. Assistant
ROBERT TERRIS, M.A., M.S., J.D. ...................................................................... Assistant
ABIGAIL TRILLIN, J.D. .......................................................................................... Assistant
JEFF UGAI ............................................................................................................ Assistant
GLEN R. VAN LIGTEN, B.S., J.D. ......................................................................... Assistant
BRUCE WAGMAN, B.S., J.D. ................................................................................ Assistant
JAMES WAGSTAFFE, B.A., J.D. ............................................................................. Assistant
CRAIG WALDMAN ................................................................................................. Assistant
LISA WALKER, J.D. ............................................................................................. Assistant
VAUGHN WALKER ................................................................................................ Assistant
ALLISON JANE WALTON, J.D. ................................................................................. Assistant
DAVID WARD, B.A., M.A., J.D. ......................................................................... Assistant
ANTON WARE B.A., M.A., J.D. ......................................................................... Assistant
JEFFREY WILLIAMS, A.B., J.D. .............................................................................. Assistant
JOHN D. WILSON, B.A., J.D. ............................................................................... Assistant
JOHN S. WORDEN, B.A., J.D. .............................................................................. Assistant
PAUL ZAMOLO., A.B., M.P.P., J.D. .................................................................... Assistant
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
Professor
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
Law
HASTINGS INTERNATIONAL AND COMPARATIVE
LAW Review
VOL. 40
Winter 2017
NO. 1
Table of Contents
ARTICLES
THE FUTURE OF TRANSNATIONAL SELF-REGULATION – ENFORCEMENT AND COMPLIANCE IN
PROFESSIONAL SERVICES ........................................................................................................................... 1
By Panagiotis Demlimatsis
The increased expansion of economic activity beyond national borders leads to a shift of
regulatory power. Public authorities concede power, explicitly or tacitly, to private bodies,
whereas the multilayered ecology of global governance inevitably increases the role of
transnational institutional structures. This article examines such developments in the area of
professional services. It starts by analyzing the self-regulation phenomenon in professional
services and points to examples where professional associations accentuate their unique nature t o
justify the importance of nonintervention in their internal affairs. Powerful professional
associations have been thereby created, which, depending on the services subsector (e.g., legal,
engineering or advertising services), are the final masters of access to and practice of a given
profession. After a critical review of the most important professional associations at the global
level, the article focuses on instances of private enforcement and goes on to examine the role of
courts in reviewing such enforcement. In this regard, constitutionality of private enforcement is
also examined. Finally, the article refers to the role of antitrust rules in harnessing distortive
business practices that professional associations may adopt. The article focuses in particular on
instances of private, decentralized enforcement. Whereas no truly transnational private regulation
in professional services has yet emerged, it is submitted that the foundations for such a
development are being built progressively as a result of borderless activities in this sector and a
relatively deferential stance on the side of the State.
SHEDDING LIGHT ON EU FINANCIAL REGULATORS: A SOCIOLOGICAL AND PSYCHOLOGICAL
PERSPECTIVE.............................................................................................................................................. 69
By Giuliano G. Castellano And Geneviève Helleringer
In the aftermath of the 2007-2009 Global Financial Crisis, financial regulation in the European
Union, following an international trend, underwent a process of intensive legal reforms that led
to the revision of the legal premises underpinning the EU architectural framework for financial
regulation and supervision. The EU has attempted to design a better equipped supranational
apparatus for the governance of financial markets and crises. This effort accompanies a more
general questioning of the role of law in the financial sector. The interaction between
financial entities and legal rules has been reexamined and novel theories have focused on the
idea that legal norms are constitutive elements of finance, rather than exogenous phenomena
that intervene upon markets’ spontaneous order as a deus ex machina. In addition, the
behavioral dynamics influencing the choices financial consumers, professional investors and
other actors of the financial markets has been scrutinized. The interaction between financial
markets and regulators has been also considered through an enriched, socio-legal vision.
These novel approaches helps to understand that the interaction among regulators, financial
entities and consumers occurs through legal and social constructions. Furthermore, the
postulate of rationality developed in financial economics and influencing the regulators’
understanding of finance has been questioned. It is now largely understood that individual
cognitive processing has limited capacity and that the brain economizes upon such processing
by relying on heuristics and other shortcuts, which will save time but also generate biases and
predictable errors. Behavioral finance moved from the fringes of financial economics to the
mainstream stage: regulatory actions are refined in order to take into account these insights
that depart from the traditional rationality paradigm.
CHALLENGES AND OPPORTUNITIES OF THE CHINA-GULF COOPERATION
COUNCIL FREE TRADE AGREEMENT ..................................................................................................... 123
By Gonzalo Villalta Puig and Alice Tung Ho Yee
The free trade agreement between China and the Gulf Cooperation Council (“GCC”) currently under
negotiation is due to become China’s first comprehensive trade and investment agreement with a
supranational customs union. The article explores the challenges and opportunities of the proposed
China-GCC Free Trade Agreement. It proposes tailor-made recommendations according to the
specific interests of both parties.
NOTE
BACKGROUND CHECKS AND EMPLOYMENT DISCRIMINATION:
DISTANT PARALLELS BETWEEN U.S. AND EU EMPLOYMENT DISCRIMINATION............................. 159
By Eugene Frid
In 2012, Halstead Management Company offered Kevin A. Jones a job as a doorman in New York
City. After the company requested a criminal background check on Mr. Jones, his offer was rescinded.
Although Mr. Jones had no criminal record, Sterling Infosystems, the large company tasked with doing the
background check, mixed up his information with the information of Kevin M. Jones, a different man with
at least three criminal convictions.
The Future of Transnational Self-Regulation –
Enforcement and Compliance in Professional
Services
BY PANAGIOTIS DELIMATSIS*
Abstract
The increased expansion of economic activity beyond national
borders leads to a shift of regulatory power. Public authorities concede
power, explicitly or tacitly, to private bodies, whereas the multilayered
ecology of global governance inevitably increases the role of
transnational institutional structures. This article examines such
developments in the area of professional services. It starts by analyzing
the self-regulation phenomenon in professional services and points to
examples where professional associations accentuate their unique nature
to justify the importance of nonintervention in their internal affairs.
Powerful professional associations have been thereby created, which,
depending on the services subsector (e.g. legal, engineering or
advertising services), are the final masters of access to and practice of a
given profession. After a critical review of the most important
professional associations at the global level, the article focuses on
instances of private enforcement and goes on to examine the role of
courts in reviewing such enforcement. In this regard, constitutionality
of private enforcement is also examined. Finally, the article refers to
the role of antitrust rules in harnessing distortive business practices that
professional associations may adopt. The article focuses in particular
on instances of private, decentralized enforcement. Whereas no truly
transnational private regulation in professional services has yet
* Professor of Law and Director, Tilburg Law and Economics Center (TILEC), Tilburg
University, the Netherlands; Fellow, Program on International Financial Systems, Harvard
Law School. Earlier versions of this article were presented at the University College Dublin,
the European University Institute in Florence, the Hague Institute for the
Internationalization of Law (HiiL) and the TILEC seminars. The author is grateful to
Fabrizio Cafaggi, Angelos Dimopoulos, Gillian Hadfield, Jens Prüfer, Colin Scott and Linda
Senden for insightful comments and valuable discussions. Remaining errors are of the
author’s alone. Contact: [email protected].
2
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
emerged, it is submitted that the foundations for such a development are
being built progressively as a result of borderless activities in this sector
and a relatively deferential stance on the side of the State.
I. Introduction
In a recent case, the United States Supreme Court had to decide on
whether pretrial restraint of legitimate, untainted assets necessary to hire
legal counsel of choice violated the Sixth Amendment.1 The Supreme
Court answered in the affirmative. This judgment is important for various
reasons. For our purposes, it is significant because, after many decades of
judicial interpretations about several aspects of legal services, it confirmed
the hybrid nature of legal services pending between the private interests of
economic actors, such as those of lawyers, on one side, and the public
interest that lawyers are still called upon to defend today.
The public nature of the legal profession is exemplified more
eloquently in the objective of the smooth administration of justice. Indeed,
as confirmed by the Supreme Court in Gideon,2 the respect of the right to
be heard is inextricably associated with the right of choosing the ‘guiding
hand’ of legal counsel. This fundamental right to counsel3 epitomizes the
distinguished role of lawyers as facilitators of the need for respecting
constitutional rights and due process in virtually all legal traditions.4
The hybrid nature of legal activity means that courts will acknowledge
the economic character of lawyers’ activities and will occasionally find that
the public character of their functioning does not exempt them from the
application of obligations that other trades, businesses, or professions must
abide by. For instance, the Court of Justice of the European Union (CJEU)
has recently found that the Directive on unfair terms in consumer contracts
applies to legal services – in this case, a contract between a lawyer and a
client-consumer relating to legal fees.5 Such obligations would apply in
addition to the obligations of independence, confidentiality and ethical
requirements. The fact that an asymmetry of information and technical
1. See Luis v United States, 578 U. S. __ (2016), judgment of March 30, 2016.
2. See Gideon v Wainwright, 372 U. S. 335 (1963).
3. See Grosjean v American Press Co., 297 U. S. 233, 243, 244 (1936).
4. Recently, the Court accepted that under certain rare and exceptional circumstances,
attorney fees may increase based on the so-called “lodestar approach”, again recognizing the
importance of adequately compensating attorneys who facilitate the administration of justice and
sometimes substitute for the deficiencies of the public prosecution system. See US Supreme
Court, Perdue v Kenny A., 559 U. S. 542 (2010).
5. See Case C-537/13, Birutė Šiba v Arūnas Devėnas, 2015 E.C.R., [hereafter Birutė Šiba]
2017]
The Future of Transnational Self-Regulation
3
knowledge exists by nature in this bilateral relationship weighed heavily in
the decision of the court.6
Similar judgments that attempt to draw a balance between the public
and the private nature of professionals abound. Globalization of economic
activity raises new questions and concerns, notably because the activity of
professionals may not be subject to domestic regulations due to the lack of
jurisdiction. As the issue of jurisdiction becomes blurred, private regulation
developed by transnational professional bodies is growing in prominence. The
legal profession has only been part of a more general trend that clearly
surfaces in professional services.7
The objective of this article is to map the landscape of transnational
self-regulation in professional services and critically review instances (and
potential problems) of enforcement, be it private, public or hybrid.
Transnational self-regulation in professional services examines the
emerging body of rules created by private actors that are active beyond
national borders and attempts to manage ex ante potential challenges that the
global nature of economic activity brings about. Increased globalization of
economic activity leads to a shift of regulatory power from public to private
and from national to global. Driven by the forces of globalization of business,
these private actors aim to offer handy solutions to global professionals
through rule-making activities that take place “in the shadow of the law” and
the traditional forms of State regulatory making.8
Inevitably, the issue of legitimacy of such actors emerges. 9 Domestic
self-regulated professional associations typically draw their legitimacy by
an act transferring powers from public bodies to such associations.
However, transnational professional associations claim legitimacy through the
participation of domestic private bodies in such associations. This “derived
legitimacy” can be highly problematic, notably in regards to enforcement.
At the outset, it appears opportune to delineate the services sectors
that we will focus on. According to the sectoral classification list (W/120)
of the General Agreement on Trade in Services (GATS)10 of the World
6. See also, Case C-94/04, Cipolla, 2006 E.C.R. I-11421.
7. For an early account, see Detlev Vagts, The International Legal Profession: A Need for
More Governance?, 90:2 AM. J. INT’L L. 250 (1996).
8. For an economic perspective on alternative modes of governance, see the treatise by
AVINASH DIXIT, LAWLESSNESS AND ECONOMICS – ALTERNATIVE MODES OF GOVERNANCE (2004).
9. See Richard Stewart, Enforcement of Transnational Public Regulation, in ENFORCEMENT
OF TRANSNATIONAL REGULATION – ENSURING COMPLIANCE IN A GLOBAL WORLD 41, 44 (Fabrizio
Cafaggi, ed., 2012).
10. Marrakesh Agreement Establishing the World Trade Organization, General Agreement
on Trade in Services (GATS), Annex 1B, Apr. 15, 1994, 1869 U.N.T.S. 183, 33 I.L.M. 1167
(1994), as reported in THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF
4
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Trade Organization (WTO),11 professional services do not form an
independent services sector, but are classified as a subsector of business
services.12 This classification contains 11 broad services sectors and one
residual category of “other services.” These sectors are further divided into
sub-sectors and sub-subsectors. The W/120 follows the structure of the
more detailed provisional Central Product Classification (CPC) system
agreed upon within the United Nations.13 Professional services within the
meaning of the GATS are considered to include a wide array of professions
such as accounting, law, architecture, advertising, architecture, engineering,
management consulting or market research.14
This article focuses on the regulation and enforcement of transnational
private regulation in legal, architectural and engineering services. After a
review of recent trends in business and professional services in Section II,
Section III discusses the rationale behind the regulation of professional
services as well as its peculiarities. An analysis of the transnational
dimension of legal, engineering and architectural services, including the
relevant actors and processes, follows in Section IV. The interaction
between private enforcement and judicial review is discussed in Section V,
whereas Section VI tackles the possibility of invoking constitutional claims
that can be raised against restrictive self-regulatory practices. Section VII
critically reviews the existing case law relating to the role of antitrustrelated claims to trump private regulation and enforcement practices by
professional associations. Section VIII concludes.
II. The Importance of Professional Services – Recent Trends
Global trade in services has grown in the last 20 years in a steadier
manner than merchandise trade. Importantly, services have been more resilient
than goods to the macroeconomic upheaval of recent times. Trade in services
suffered significantly only in 2009, decreasing almost 10 percent. However, in
MULTILATERAL TRADE NEGOTIATIONS 284 (1999) [hereinafter GATS].
11. Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867
U.N.T.S. 154, 33 I.L.M. 1144 (1994), THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND
OF MULTILATERAL TRADE NEGOTIATIONS 4 (1999), [hereinafter Marrakesh Agreement or WTO
Agreement].
12. GATS, supra at note 10, “Services Sectoral Classification List,” MTN.GNS/W/120, 10
July 1991. The GATS is the first and only international agreement regulating trade in services,
agreed on as an Annex to the World Trade Organization Agreement entered into force in 1995.
13. United Nations Statistical Papers, Provisional Central Product Classification, Series M
No. 77, (1991). The United Nations Statistics Division currently uses the CPC Version 2.1.
14. See GATS, supra at note 10, “Trade in Professional Services,” Note by the Secretariat,
MTN.GNS/W/67, (1989).
2017]
The Future of Transnational Self-Regulation
5
2010, it resumed its precrisis levels, whereas global services exports grew by
five percent in 2014. On average, trade in services has still increased by
eight percent annually in the last two decades. Exports of commercial
services by WTO Members totalled US$4.87 trillion in 2014, about a fifth
of global trade. Having said this, such statistics routinely underestimate the
value of services trade, as they fail to capture investment flows by foreign
affiliates in an accurate way. For instance, in terms of value added,
services are regarded as accounting for 40 percent of total trade.15
Services account for most of US and world economic output. An
average of over 70 percent of GDP and jobs in the OECD countries are due
to a service-related activity. The EU is the leading importer and exporter
of services,16 followed by the US. Business services play a particularly
important role in all modern economies and are regarded as essential drivers of
economic growth. Many of the activities covered by this sector of the
economy (legal, accounting and auditing, market research, advertising, and
other business activities such as computer services, real estate, or R&D) have
fully exploited the outsourcing phenomenon, which may explain their
recent rapid growth. The rapid development of business process
outsourcing (BPO) is the result of unprecedented advances in information
and communication technologies (ICT) and their application to everyday
business. Outsourcing of legal services typically occurs through subcontracting certain services to an independent supplier. However, large law
firms may decide to establish their own premises abroad and thus control
recruitment and training. This is the case with Clifford Chance in India, for
instance. Outsourcing parts of a project has also increased in architecture.
More specifically, the global market for legal process outsourcing
(LPO) accounted for over US $1 billion in 2012, growing exponentially
since the burst of the financial crisis in 2008. Estimates suggest that LPO
could grow as much as US $8.5 billion by 2020, leading to the blossoming
of a new sub-sector of legal services, that is legal support services.17 With
an average rate of 30 percent annually, LPO is the fastest growing segment
in India.18 Revenue from LPO is expected to exceed US$1 billion in 2016
15. See Rainer Lanz & Andreas Maurer, Services and Global Value Chains – Some
Evidence on Servicification of Manufacturing and Services Networks, WTO Working Paper
ERSD-2015-03, (2015).
16. Being a customs union, the 28 member States of the European Union (EU) are trivially
taken as one entity (customs territory) in global statistics.
17. See Grand View Research, Legal Process Outsourcing (LPO) Market Analysis by
location, by services and segment forecasts to 2020, April 2014. See also Integreon, ‘Submission
on Legal Process Outsourcing to ABA Commission on Ethics 20 /20,’ June 2010.
18. ValueNotes, LPO fastest growing segment in India, March 12, 2014, http.//www.sourci
nquotes.com/content/view/913/1.
6
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
and to employ 32,000 professionals in India. In addition, it transforms
outsourcing, as Indian IT companies active in BPO also offer LPO to their
global clients. Outsourcing-related work has more recently evolved to satisfy
demands for higher quality, giving rise to a new phenomenon, called
‘knowledge process outsourcing’ (KPO). In India only, KPO employed
more than 250,000 professionals in 2014.19
The increasing willingness of companies located in developed
countries, mainly in Europe and the United States, to outsource noncore
business functions also reinforces this trend. This trend was affected by the
recent financial crisis only momentarily. From call centers to legal
research and text editing, manifold operations of developed-country
companies are supplied by companies established in India, Philippines or
elsewhere nowadays.20 This phenomenon explains the fact that almost half
of the cross-border exports of services worldwide is in business services.
Bar associations acknowledged the paradigm shift and revised their rules to
accommodate contemporary concerns relating to professional liability,
integrity and independence. For instance, the American Bar Association
(ABA) recently revised its model rules on professional conduct to tackle, inter
alia, the growing phenomenon of outsourcing.21
Business services are typically provided to other enterprises (but also
to public administration), whereby they often become part of complex
production processes. Nonetheless, several business services, such as legal,
engineering or architectural services, are also supplied to households.
Business services exert an enabling role in bettering competiveness and overall
performance of any economy. For instance, in terms of value added, business
services was the largest sector within the EU-28’s nonfinancial business
economy. In the EU, business services account for over half of the nonfinancial business economy and for about 30 percent of total trade in services.
In the EU only, about 21 million people and over 4 million enterprises
provide services in business services, many of them being small and medium
enterprises (SMEs).22 Legal, accounting, management consultancy,
engineering and architectural services hold the lion’s share in this area of
services.23 While hit by the financial crisis, these services recorded doubledigit growth between their mid-crisis lows in 2009 and the second quarter
19. Id.
20. For a study on BPO, see UNCTAD, E- Commerce and Development Report 2003 (United
Nations Publication, 2003), Chapter 5. http.//www.sourcinquotes.com/content/view/ 913/1.
21. See Model Rules of Prof’L Conduct R.5.3 (2012).
22. See European Commission, High-Level Group on Business Services – Final Report, 63 (2014).
23. “Business services: recent economic developments,” statistics in focus,
EUROSTAT, Issue 35 (2011).
2017]
The Future of Transnational Self-Regulation
7
of 2015.24 Export of such services in the EU and the U.S. have also grown
quite substantially, recording an increase of eight percent and seven
percent, respectively, in the years 2010-2013. They both account for
around 40 percent of global trade in business services.25
The importance of several business services lies in their added value,
that is, the overall impact they have on the economy. Subsectors of
business services, such as legal services or advertising, have value-added
traits leading to higher labour productivity and positive spillovers. For
instance, advertising is essentially a distributive activity with a high level
of turnover and high sales relative to personnel costs. The same goes for
professional services.
The growth of the sector globally is driven by strong export demand,
whereas innovations in ICT increase opportunities for further development
of the sector trespassing geographical borders and downplaying previously
insurmountable barriers. Business, professional and technical services are
among the most flourishing services sectors in the developed world.26
Developing countries keep apace closely. Other than India, where those sectors
are among the main export sectors, in Brazil, those sectors accounted for 45
percent of Brazil’s total commercial services exports in 2007, with a value of
over US$10 billion. Architectural, engineering and other technical consultancy
services are the largest subsectors, followed by legal services. In certain sectors
like engineering, offshoring is the first stage sometimes leading to bigger shifts
of production loci in emerging countries.27
The phenomenon of outsourcing has also contributed greatly to the
rapid growth of the business sector, as businesses increasingly realize the
benefits that they can seize by buying business services through specialized
enterprises instead of producing them in-house. Having said this, certain
service activities are more readily exportable than others. This is due to the
fact that they are transferable more easily through electronic means, they do
not require commercial presence (or require only a limited one) nor thorough
knowledge of the export market, its laws or preferences. This is, for
instance, the case with computer services and increasingly with some
professional services, education or health care services. The same goes for
24. See, “Services statistics – short-term indicators,” EUROSTAT, September 2015,
available at: http://ec.europa.eu/eurostat/statistics-explained/index.php/Services_statistics
_-_short-term_ indicators.
25. See WTO, International Trade Statistics 2015, pp. 143, 144.
26. Id. at 144.
27. See Leonard Lynn and Hal Salzman, Engineers, Firms and Nations: Ethical Dilemmas
in the New Global Environment, in ENGINEERING ETHICS FOR A GLOBALIZED WORLD 15, 20
(Colleen Murphy et al., eds., 2015).
8
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
various back office support and so-called knowledge services such as
research and development.
III. Regulating Professional Services
A. The Challenges of Regulating Professionals
Services are typically nontangible, nonstorable, and above all
heterogeneous with limited possibilities of mass production. Thus, many
of the most “effective” barriers to free movement of services relate to preor post-establishment of juridical and natural persons.28 Such barriers are
typically enshrined in domestic regulations promulgated by public, but also
private bodies. Quality, the “holy grail” of every law or regulation governing
services, is closely intertwined with the characteristics, qualifications,
experience, and so forth of each individual service provider. This trait of
services regulations increases the transaction costs and undermines the pursuit
of efficiency when regulating this highly heterogeneous sector of the economy.
Regulations on services are designed by a well-intentioned
government which, driven by public interest considerations, seeks to
contend with perceived market failures such as those typically associated
with externalities, information inadequacies, or imperfect competition and
misuse of market power.29 In the case of professional services, information
asymmetries and competition concerns appear to be the most important
market failures. Information inadequacies mostly appear in a wide range of
intermediation and knowledge-based services. The nature of the services
supply and the direct contact involved between suppliers and consumers
generate significant risks. The consequences of asymmetric information
may not be easily reversible for consumers who lack information about the
skills that a given service supplier has.30 While the quality of some
products, such as milk or sugar, can be ascertained on inspection prior to
sale (search goods), others, including almost all types of services, cannot
be evaluated until received, used or consumed (experience goods).31 In
28. Cf Panagiotis Delimatsis, Due Process and “Good” Regulation Embedded in the GATS
– Disciplining Regulatory Behaviour in Services Through Article VI of the GATS, 10:1 J. INT’L
ECON. L. 13, 16 (2007).
29. Carlo Gamberale & Aaditya Mattoo, Domestic Regulations and Liberalization of Trade
in Services, in DEVELOPMENT, TRADE, AND THE WTO: A HANDBOOK 290 (Bernard Hoekman et
al., eds., 2002); also STEPHEN BREYER, REGULATION AND ITS REFORM 15- 35 (1982).
30. Cf. Birutė Šiba, supra note 5, at ¶23.
31. Phillip Nelson, Information and Consumer Behavior, 78:2 J. POLIT. ECON. 311
(1970); also George Akerlof, The Market for “Lemons”: Quality Uncertainty and the
Market Mechanism, 84:3 Q. J. ECON. 488 (1970).
2017]
The Future of Transnational Self-Regulation
9
extreme cases (e.g., construction of a house ostensibly complying with antiseismic regulations), the effects of use or consumption are made known
only years later (credence goods).32
Since markets may not provide appropriate incentives for the acquisition
and dissemination of information, appropriate legislation that requires disclosure
of certain information could in theory remedy the problem. Nevertheless, it may
be too expensive to communicate the necessary information to individual
consumers. In such cases, instead of educating the consumers, it is more costeffective to regulate suppliers. In particular, the governmental intervention will
prescribe the type of information that needs to be provided and will thereby help
potential buyers evaluate the information that is being supplied.
An interference with the market may be motivated by the need for
accomplishing noneconomic, social goals, such as redistribution of income,
consumer protection, universal service, etc., in order to assure equity, or may even
take place because of clearly paternalistic motivations.33 These regulatory goals
are rather horizontal in nature; hence, they are applicable across the board to all
services sectors. This fact can be decisive when determining the nature of the
instruments (e.g., whether they should be specific to a certain sector or of
general application). In other words, the fact that similar public policy
objectives are sought across sectors may be indicative of the need to use
similar instruments. This, however, may be way too simplistic an approach, as
an objective can be served in various degrees; and this already within a given
services sector such as professional services. For instance, the higher stakes
for the consumer and the public good in the area of engineering rather than
advertising services will lead to heavier regulation of access to the former
profession. In this case, ex ante regulatory intervention acts preventively.
Professional services are regarded as labour-intensive services. Their central
trait is the supply of human capital acquired through high standards of education
and training. In addition, access to professional services is typically subject to
certain licensing and qualification requirements, which determine issues relating
to entry and practice of a given profession.34 Such requirements are imposed
either by the State or through self-regulation by professional bodies – or both. In
the latter case, access restrictions imposed by professional bodies dominated by
active market participants are not based on quality-related considerations but aim
32. Michael Darby & Edi Karni, Free Competition and the Optimal Amount of Fraud,
16:1 J. LAW ECON. 67 (1973). The authors demonstrate that in the case of goods that have
credence qualities, a governmental intervention would not lead to an efficient allocation of
resources and thus would be preferable to leave the market unregulated.
33. ANTHONY OGUS, REGULATION: LEGAL FORM AND ECONOMIC THEORY 51 (1994).
34. See, Duc Nguyen-Hong, “Restrictions on Trade in Professional Services,” Productivity
Commission Staff Research Paper, (2000).
10
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
many times at restricting supply of newcomers artificially, thereby keeping
prices at a high level to the benefit of incumbents.35 For instance, studies
showed that State licensing requirements and ABA regulations lead to excessive
earnings premiums for lawyers.36
Typically, in this case the regulating bodies of the professional
associations are the fora whereby like-minded incumbents harmonize their
practice and essentially act as yet another cartel.37 As noted recently by the
United States Supreme Court in North Carolina State Board of Dental
Examiners v. FTC, dual allegiances are not always apparent to a professional
who also acts as a regulator.38 The resulting monopoly outcome reallocates
income from lower income consumers to higher income professionals.39
Harmonization and mutual recognition efforts in the area of business
services and notably professional services already within the EU, which is a
fairly integrated example of transnational legal order, have met with limited
overall success to date.40 Even for professional services, where automatic
recognition of professional qualifications was agreed on within the EU, such as
architecture, one should not lose sight of the fact that this was the result of
lengthy negotiations and discussions that lasted more than fifteen years.41
This is not to say that harmonization and mutual recognition in the area of
professions is a walkover. On the contrary, professional peculiarities abound and
complicate any effort to draw common standards even within federal or quasifederal, decentralized systems. To name but one example, because of the
heterogeneous country-specific characteristics and requirements of practice in the
engineering profession, automatic recognition may not be the wisest option.
All these professional peculiarities highlight the difficulties that any
horizontal, i.e., across-services sectors, regulatory intervention may face.
35. See MORRIS KLEINER, LICENSING OCCUPATIONS: ENSURING QUALITY OR RESTRICTING
COMPETITION? 65 – 96 (2006).
36. Such premiums amounted to $64 billion in 2004, or $71,000 per lawyer. See CLIFFORD
WINSTON ET. AL, FIRST THING WE DO, LET’S DEREGULATE ALL THE LAWYERS (2011).
37. See Aaron Edlin & Rebecca Haw, Cartels by Another Name: Should Licensed
Occupations Face Antitrust Scrutiny?, U. PA. L. REV. 1093, 1102 (2014).
38. The Court noted that for this reason antitrust accountability is necessary to ensure the
undistorted functioning of markets. See, North Carolina State Board of Dental Examiners v.
FTC, 574 U.S. __ (2015); also Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U. S.
492, 500 (1988).
39. Maury Gittleman et al., Analyzing the Labor Market Outcomes of Occupational
Licensing, National Bureau of Economic Research Working Paper 20961, (2015).
40. See TINNE HEREMANS, PROFESSIONAL SERVICES IN EU INTERNAL MARKET – QUALITY
REGULATION AND SELF-REGULATION (2012).
41. EEC Directive 85/384/EEC 1985 OJ L 223/15 on the mutual recognition of diplomas,
certificates and other evidence of formal qualifications in architecture, including measures to
facilitate the effective exercise of the right of establishment and freedom to provide services.
2017]
The Future of Transnational Self-Regulation
11
Within the EU, two major achievements in the wake of the new millennium
gave a new impetus to the liberalization of regulated professions.42 The
first is the adoption of the directive on professional qualifications (PQD)
providing for the mutual recognition of professional qualifications for such
professions.43 Contrary to previous practice, the directive also called for
the recognition of qualifications of those professionals who offer their
services in another EU Member State (MS) only temporarily. In addition, the
directive confirmed the automatic recognition for certain professions, such as
doctors, architects or midwives,44 and in essence requires the mutual
recognition of practical experience for professionals. The most recent directive
amending the PQD introduced the European professional card, a mechanism
that will further lead to the erosion of protectionist biases by host MS, but also
facilitate mobility of professionals within the EU.45 For instance, in several
EU MS the use of the engineering card, a professional card for engineers,
which documents educational and professional qualifications and other
information with a view to simplifying recognition, is a reality for the sector.46
The other achievement in the realm of liberal professions in the EU was the
adoption of the Services Directive.47 To be sure, its timing was unfortunate, as it
was associated with the fear of several MS against uncontrolled flows of migrants
from the new Eastern European MS to the “old” EU15 MS. Thus, the major tool
to achieve full integration in the area of services, i.e., the country of origin
principle, did not find its way to the final text of the Directive. Having said that,
this principle was replaced by the principle of free movement in services set out in
Article 16 of the Services Directive.48 In addition, the Services Directive is an
important legislative development in that it confirmed the importance of home
country control49 and that the host country can only take measures in exceptional
42. See Panagiotis Delimatsis, Standardization in Services – European Ambitions and
Sectoral Realities, 3 EUR. L. REV. 513 (2016). See also Erik Canton et al., The Economic Impact
of Professional Services Liberalization, European Commission Economic Papers No 533, (2014).
43. Directive 2005/36/EC on professional qualifications [2005] OJ L 255/22.
44. Automatic recognition means that no discretion is left to the host country. See Case C365/13, Ordre des architects, E.C.R. 280.
45. See Counsil Directive 2013/55, 2013 O.J. (L. 354/132) (EU). See also European
Commission, “Action Lines for Liberal Professions – Final Report of the Working Group,” 7
(2015).
46. See High- Leval Group on Business Services, note 22, at 120.
47. Council Directive 2006/123, 2006 O.J. (L376/36) [hereinafter Services Directive].
48. See European Commission, Handbook on the implementation of the Services
Directive 36 (2007).
49. See also Case C-458/08, Commission v Portugal, 2010 E.C.R. I-11599. This is also in
line with the expression of the principle of mutual recognition in the area of services in cases like
C-76/90, Säger, 1991 E.C.R. I-4221; Cipolla, supra note 6.
12
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
circumstances relating to the safety of a given service.50
There are 4,600 regulated professions in the EU nowadays. In the case of
professional services, an important subsector of business services, regulatory
diversity already at a subnational level creates challenges for service suppliers who
are interested in exploring market access opportunities beyond their region.
Professional services regulations may differ substantially among the various
professions based on manifold public policy considerations, but also long-standing
traditions protected faithfully by professional associations. This sector displays
restrictive regulatory measures spanning from burdensome entry requirements
(e.g., licensing restrictions or onerous procedures) to sometimes prohibitive postentry requirements, such as restrictions (or even outright prohibitions) on
advertising; fixed or recommended minimum or maximum prices; reserved tasks
and exclusive rights; or mandatory business structure and multidisciplinary
practices.51 This indicates that, even within highly integrated markets, such as the
U.S. or the EU, services maintain their trait of being very vulnerable to regulations
impeding their supply.52
B. Delegation, Self-Regulation, Co-Regulation
As noted earlier, the potentially chilling effect of regulations is in part due to
the peculiar nature of services relating to the intangibility, nonstorability and
heterogeneity. It is all the more so in professional services where serving the
interests of each client necessitates a different treatment by the professional service
supplier. In addition, the quality of the service is closely intertwined with the
characteristics, education, qualifications, or experience of each individual service
provider, as well as the domestic preferences and traditions of each EU MS.
It is in part this peculiar nature of services that had led several
countries to abandon “command-and-control” regulation in professional
services and essentially outsource the establishment of rules relating to the
access and pursuit of a profession to the respective professional
associations. The fact that professionals in the three professions covered in
this article have grown in prominence is also a factor that made selfregulation be regarded as an appealing alternative to state regulation. Crucially,
private ordering in the field of professional services has been diachronic; such
rules existed before the adoption of public regulation; once the latter emerged,
private ordering has coexisted with – and many times de facto superseded –
public forms of regulation.
50. See Art. 18 in conjunction with Art. 35 of the Services Directive, supra note 47.
51. Cf. Report on Competition in Professional Services, COM(2004) 83 (EC).
52. See also PANAGIOTIS DELIMATSIS, INTERNATIONAL TRADE IN SERVICES AND DOMESTIC
REGULATIONS – NECESSITY, TRANSPARENCY AND REGULATORY DIVERSITY 62 (2007).
2017]
The Future of Transnational Self-Regulation
13
Self-regulation entails an explicit or tacit transfer of authority to
private bodies, which allows them to delineate a sphere of expertise,
establish conditions for membership, limit competition for nonmembers (either
because they objectively do not qualify or because the incumbents want to
maximise their rents), and impose deontological rules of conduct on
professionals which would protect the integrity of the profession and ensure
the quality of the service provided.53 Self-regulation further entails monitoring
of compliance with such rules and instituting enforcement mechanisms.54
Compliance in particular with private enforcement mechanisms would be a
function of the importance of the membership. If exit is costly, then
compliance will most likely occur to avoid negative effects on the possibility
for trading in the future.
Professional associations regulate access and pursuit of a given
profession ostensibly with a view to ensuring high levels of consumer
protection. However, they also represent the professionals. Therefore,
their role is to promote the interests of their members. More often than not,
the two functions (regulatory and representative) cannot be easily reconciled.
Thus, conflicts of interest may and do actually arise, notably because of the
exercise of this dual function performed by private regulators.
In establishing rules relating to the regulation of professions, the
private sector is called upon to fulfill a decisive regulatory role and serve
the objective of managing access to the profession with a view to
improving efficiency, quality, and competitiveness. Surveillance and
enforcement of these rules is typically guaranteed by the fact that
registration with the relevant professional body is a precondition for the
taking up and pursuit of the particular profession at issue. Compulsory
registration allows for more effective supervision of professional conduct
and, accordingly, sanctions against those professionals who do not adhere
to the rules established by the professional body, including deontological
rules usually contained in the respective sectoral code of conduct (CoC).
Disciplinary cases can be treated more efficiently due to the Damoclean
sword of exclusion from the club in case of noncompliance.55
According to Dixit, such relation-based governance systems can work
only provided that, (i) the norms of good conduct are clearly understood;
53. STEVEN BRINT, IN AN AGE OF EXPERTS: THE CHANGING ROLE OF PROFESSIONALS IN
POLITICS AND PUBLIC LIFE (1994).
54. See also Julia Black, Decentering Regulation: Understanding the Role of
Regulation and Self-Regulation in a Post-regulating World, 54 in CURRENT LEGAL
PROBLEMS 103 (2001).
55. See also Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual
Relations in the Diamond Industry, 11 J. LEGAL STUD. 115 (1992).
14
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
and (ii) information about adherence or rather violations of these norms
must be diffused to all members of the association accurately and quickly.56
However, in practice, the accuracy of communication and adherence to the
norms and collective sanctions which is necessary for the success of such
associations can be challenged by the number and heterogeneity of
transactors and the increased size and complexity of transactions.57 Indeed,
self-regulation seems to work better in small, relatively homogeneous and
interconnected industries where the threat of outside regulation adequately
incentivizes the industry to regulate itself.58 More generally, good
regulation nowadays implies that a regulator is able to adopt different
responsive enforcement strategies depending on whether the regulatee is a
leader, reluctant complier, the recalcitrant or the incompetent.59
To retain self-regulatory powers, professional associations emphasize
the central role of specialized expertise and the existing institutional
arrangements to maintain the benefits of such expertise. This would allow
them to create their own “living space,” shielded from the market and the
state.60 This may be necessary in order to protect their alleged uniqueness and
independence. For instance, the preamble of the Model Rules of Professional
Conduct of the American Bar Association (ABA) provides:
The legal profession is largely self-governing. Although
other professions also have been granted powers of selfgovernment, the legal profession is unique in this respect
because of the close relationship between the profession and
the processes of government and law enforcement. This
connection is manifested in the fact that ultimate authority
56. Avinash Dixit, “Relation-based Governance and Competition” (on file with the author).
57. Others have argued that the a coordinating function ensuring a common logic, i.e., a
system of reasoning that generates unique common knowledge classifications of conduct,
provided by a third-party (private) institution supplying a system of neutral reasoning could
ensure the sustainability of a decentralized enforcement system. See Gillian Hadfield & Barry
Weingast, What is Law? A Coordination Model of the Characteristics of Legal Order, 4:2 J.
LEGAL ANALYSIS 471 (2012).
58. Cary Coglianese & Evan Mendelson, Meta-Regulation and Self-Regulation, THE
OXFORD HANDBOOK OF REGULATION 146, 154 (Richard Baldwin et al., eds., 2010).
59. Neil Gunningham, Enforcement and Compliance Strategies, THE OXFORD
HANDBOOK OF REGULATION 121, 126 (Richard Baldwin et al., eds., 2010).
60. See Tanina Rostain, Self-Regulatory Authority, Markets, and the Ideology of
Professionalism, THE OXFORD HANDBOOK OF REGULATION 169, 170 (Richard Baldwin et al.
eds., 2010), noting that “as professions obtained self-regulatory powers, they instituted
measures – including educational and accreditation standards, ethics codes, and workplace
structures – to demarcate spaces of discretionary expertise insulated from penetration by
either market logic or state control.”
2017]
The Future of Transnational Self-Regulation
15
over the legal profession is vested largely in the courts.
To the extent that lawyers meet the obligations of their
professional calling, the occasion for government regulation
is obviated. Self-regulation also helps maintain the legal
profession’s independence from government domination. An
independent legal profession is an important force in
preserving government under law, for abuse of legal authority
is more readily challenged by a profession whose members
are not dependent on government for the right to practice.
By the same token, the Council of Bars and Law Societies of Europe
(CCBE), which is the ABA counterpart in Europe, has also taken issue with
public regulation in the field of legal services by emphasizing that:61
An independent legal profession is the cornerstone of a free
and democratic society. Self-regulation, conceptually, must
be seen as a corollary to the core value of independence.
Self-regulation addresses the collective independence of the
members of the legal profession. Exclusive direct state
regulation, without a leading role for the profession in the
setting and enforcing of standards of conduct and of service,
is incompatible with an independent legal profession.
The CCBE went on to underscore the benefits of self-regulation such as
voluntary availability of expertise to regulate the subject matters relating to the
legal profession, high level of acceptance of standards set and enforced by
professional colleagues, flexibility and cost-effectiveness.
The importance of the independence of the legal profession has also been
hailed by the judiciary. The Supreme Court of Canada in Canada (Attorney
General) v. Law Society of British Columbia ruled:62
61. See CCBE Position on Regulatory and Representative Functions of Bars (June
2005),
http://www.ccbe.org/fileadmin/user_upload/NTCdocument/ccbe_position_on_reg
1_1182254709.pdf (last visited on Jan. 15, 2016).
62. Canada (Attorney General) v. Law Society of British Columbia (1982) 2.S.CR. 307,
336-7 (Can.). See also Judgment of the High Court of Judicature at Bombay, Lawyers
Collective v. Bar Council of India and others, W.P. 1526/1995, at ¶56 (2009). See, along
these lines, the statement by the CJEU in Jakubowska: “The absence of conflicts of interest
is essential to the practice of the profession of lawyer and requires, in particular, that
lawyers should be in a situation of independence vis-à-vis the public authorities and other
operators, by whom they must never be influenced.” C-225/09, 729, ¶61 (2010).
16
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
The independence of the Bar from the state in all its
pervasive manifestations is one of the hallmarks of a free
society. Consequently, regulation of these members of the
law profession by the state must, so far as by human
ingenuity it can be so designed, be free from state
interference, in the political sense, with the delivery of
services to the individual citizens in the state,
particularly in fields of public and criminal law. The
public interest in a free society knows no area more
sensitive than the independence, impartiality and
availability to the general public of the members of the
Bar and through those members, legal advice and
services generally. The uniqueness of position of the
barrister and solicitor in the community may well have
led the province to select self-administration as the
mode for administrative control over the supply of legal
services throughout the community.
In India, the Apex Court noted in Indian Council of Legal Aid and
Advice v. Bar Council of India that:63
The bar Councils are enjoined with the duty to act as
sentinels of professional conduct and must ensure that
the dignity and purity of the profession are in no way
undermined. Its job is to uphold the standards of
professional conduct and etiquette. Thus, every State
Bar Council and the Bar Council of India has a public
duty to perform, namely, to ensure that the monopoly of
practice granted under the Act is not misused or abused
by a person who is enrolled as an advocate. The Bar
Councils have been created at the State level as well as
the Central level not only to protect the rights, interests
and privileges of its members but also to protect the
litigating public by ensuring that high and noble
traditions are maintained so that the purity and dignity
of the profession are not jeopardized. It is generally
believed that members of the legal profession have
certain social obligations, e.g., to render “pro bono
63. Indian Council of Legal Aid and Advice v. Bar Council of India 1995 1 SCC 732 (India).
2017]
The Future of Transnational Self-Regulation
17
publico” service to the poor and the underprivileged.
Since the duty of a lawyer is to assist the court in the
administration of justice, the practice of law has a
public utility flavour and, therefore, he must strictly and
scrupulously abide by the Code of Conduct behoving
the noble profession and must not indulge in any activity
which may tend to lower the image of the profession in
society. That is why the functions of the Bar Council
include the laying down of standards of professional
conduct and etiquette which advocates must follow to
maintain the dignity and purity of the profession.
In a similar vein, the US Supreme Court stated in Goldfarb:64
The interest of the States in regulating lawyers is
especially great since lawyers are essential to the
primary governmental function of administering justice,
and have historically been “officers of the courts.”
However, the more such associations control the market for the supply
of a given service, the more frequent complaints of their excessive power
and abuse become. Furthermore, regulatory capture can occur not only
when governments regulate, but also in the case of self-regulation by
professional associations.65 In addition, existing barriers relating, for instance,
to lack of recognition of professional qualifications or to licensing conditions
generate deadweight losses. These characteristics of services regulations
increase transaction costs and can undermine the pursuit of efficiency when
regulating this highly heterogeneous sector of the economy. This regularly
leads governmental authorities to scrutinize complaints about anticompetitive
practices, market foreclosure, excessive prices and monopolies, and to balance
the interest of maintaining the delegation of power to such private bodies
against the public interest. Some go as far as to advocate deregulation of
certain professional services.66
A central issue in professional services is what form of regulation can
64. Lewis Goldfarb v. Virginia State Bar, 421 US 773 (1975).
65. George Stigler, The Theory of Economic Regulation, 2 BELL J. ECON. 3 (1971);
Richard Posner, Theories of Economic Regulation, 5 BELL J. ECON. 335 (1974); & John
Kay, The Forms of Regulation, FINANCIAL REGULATION – OR OVER-REGULATION 33 (Arthur
Seldon, ed., 1998).
66. See, with respect to the legal sector, James Moliterno, The Trouble with Lawyer
Regulation, 62 EMORY LAW J. 101 (2013).
18
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
better achieve the legitimate objectives that are relevant for each
profession, such as the integrity of the profession, professional competence,
consumer protection and the like. Typically, state intervention is premised
on the need to address market failures, most notably created by information
asymmetries between service providers and their clients regarding the
quality of services rendered. Indeed, where information costs are high, ex
ante regulation of the industry and setting of quality standards may be an
adequate form of regulation. Opponents of self-regulation would argue that
it can only be justified by a self-interest maximiser viewpoint,67 as the
protection of public interest can only be ensured by state intervention. This
paternalistic view is premised on the belief that professional associations
cannot adequately protect the interests of their members and those of
consumers at the same time. Consumer lobbies may actually also subscribe
to this paternalistic view, notably on price competition grounds.
On the other side of the spectrum, proponents of self-regulation would
argue that a bottom-up approach would be more apposite due to expertise
and insider knowledge that only the professionals themselves may have.
Especially when the private group entrusted with self-regulatory powers is
sufficiently cohesive or solidary and pursues State-like objectives, thereby
acting as another agent of the State, transfer of resources to such groups
appears to be the most efficient solution for the State.68 Professional
associations can draft and review rules more quickly and flexibly than any
State authority to better serve consumers without unduly hampering the
supply of the services at issue. Norm-making groups may also adapt more
quickly in the aftermath of exogenous shocks, thereby showing their
mutability forces that partly explain their dominance in norm-making.69 In
that case, any state interference would be counter-productive, whereas any
legal rules designed to regulate intra-group relations would negatively affect
the group’s ability to regulate its members. In fact, with the exception of rules
that deter extreme bad faith conduct, even rules that merely duplicate the
group’s own norms will generally undermine self-regulation.70
Self-regulation cannot be regarded as an absolute prerogative, as
67. See ROBERT ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBOURS SETTLE
DISPUTES (1991), using several case-studies to show that members of a close-knit group
develop and abide by norms whose content serves to maximize the aggregate welfare that
members obtain in their work-a-day affairs with one another.
68. See Eric Posner, The Regulation of Groups: The Influence of Legal and Nonlegal
Sanctions on Collective Action, 63 CHICAGO L. REV. 133, 136 (1996).
69. See, generally, RESILIENT LIBERALISM IN EUROPE’S POLITICAL ECONOMY, (Vivien
Schmidt & Mark Thatcher, eds., 2015); Robert Ellickson, The Market for Social Norms, 3: 1
AM. L.& ECON. REV. 1, 22 (2001).
70. Id.
2017]
The Future of Transnational Self-Regulation
19
private groups exercise power that can be reclaimed by the state or
constrained by the public judicial system. More generally, experiments
with regulation and regulatory approaches are a frequent phenomenon
nowadays.71 Co-regulation or cooperative regulation in several sectors of the
economy is, for instance, a form of regulation that goes beyond the coercion
that State authority can exert.72 Co-regulatory approaches allow self-regulation
and state regulation to meet with a view to optimizing regulatory performance
and more efficiently addressing market failures and certain malfunctions.
In the case of important unforeseen negative externalities,
governments can reclaim authority anytime, notably taking advantage of
the elusive nature of the concept of “public interest.”73 For instance, the
recent Legal Services Act in England challenges the earlier unfettered
power of the Law Society of England and Wales to regulate the legal
profession. A new oversight regulator, the Legal Services Board (LSB), is
created to serve as a single, independent, and publicly accountable regulator
with the power to enforce high standards in the legal sector and oversee the
approved regulators such as the Law Society. Approved regulators are now
obliged to distinguish among representative and regulatory functions. The Act
also creates an Office of Legal Complaints (OLC), which removes handling
of complaints by the legal profession in order to restore consumer
confidence that complaints are handled independently and without selfinterest; that they are handled efficiently, fairly and quickly.74 In 2010, the
OLC established the Legal Ombudsman, who is in charge of complaints
against lawyers in England and Wales. The dispute resolution services
offered are free of charge, in principle. In 2014-15 alone, the Ombudsman
services helped resolve about 7,500 complaints.75
71. Cf. Grainne de Búrca, Robert Keohane & Charles Sabel, Global Experimentalist
Governance, 44(3) BRIT. J. POLIT. SCI. 477 (2014).
72. One of the OECD best practices in regulating professional services suggests that
professional associations should not be granted exclusive jurisdiction and rather be subject
to independent (probably state-centered) scrutiny in making decisions about entrance
requirements, mutual recognition, or the boundary of their exclusive rights. See OECD
Summary Report of the Study on Globalisation and Innovation in the Business Services
Sector, at 16 (2007), available at http://www.oecd.org/dataoecd/18/55/38619867.pdf.
73. See Mike Feintuck, Regulatory Rationales beyond the Economic: In Search of the
Public Interest, in THE OXFORD HANDBOOK OF REGULATION 39, 45 (Richard Baldwin et al.,
eds., 2010).
74. UK Ministry of Justice, Legal Services Bill – Regulatory Impact Assessment, 10
(2006), http://www.justice.gov.uk/publications/legalservicesbill.htm.
75. Over one fifth of these complaints relates to residential conveyancing. See The
Office for Legal Complaints/Legal Ombudsman, Annual Report and Accounts for the Year
Ending 31 March 2015 (2016), http://www.legalombudsman.org.uk/wp-content/uploads/
2014/09/Annual-Report-2014-15.pdf.
20
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Similar concerns in Australia led the government to step in to
essentially end self-regulation in the legal profession. This was, for
instance, the case through the Queensland Legal Profession Act of 2007.
More recently, it appears that Australia has moved towards co-regulation
that distinguishes between regulatory and representative functions of the
Bar, while relying on the integrated involvement of government, the legal
profession and the courts.76 Although these changes were initially backed
up by all territories, in the end, only two Australian jurisdictions decided to
move forward with sweeping reforms in the legal sector. In July 2015,
New South Wales and Victoria (accounting for approximately 80 percent
of practising lawyers in Australia) started applying the Legal Profession
Uniform Law,77 which creates a Legal Services Council as the overseeing
body, but resolutely moves towards principles-based regulation of the legal
profession with clearly established regulatory objectives, a first for the
Australian legal sector. Day-to-day regulation remains with the
relevant regulatory bodies such as the Law Council of Australia (for
solicitors) and the Australian Bar Association (for barristers). The
Office of the Legal Services Commissioner is in charge of complaints
against lawyers based on the Uniform Law Application Act of 2014 .
Divergences in regulatory approaches affect the degree of influence of
professional associations on the making of rules that affect them.
The situation, including the issue of enforcing professional
obligations against wrongdoers, becomes more complex once self-regulation
of a given profession becomes borderless at the transnational level. Issues of
jurisdiction and conflict surface and, quite astonishingly, their complexity
nourishes the evolution of transnational regulation and private ordering. As a
rule, professions dislike public rules and governmental intervention. This
should not be taken to mean that the rules created by private bodies have a
different starting point than that of public rules: They both aim to create “social
order by focusing or channelling the diverse, arbitrary, even chaotic motives or
actions of individuals into a few socially privileged alleys by making
compliance a normative demand.”78 To be sure, compliance may be ensured
through different avenues and at a varying degree.
76. Paul Paton, Cooperation, Co-option or Coercion? The FATF Lawyer Guidance and
Regulation of the Legal Profession, JOURNAL OF THE PROFESSIONAL LAWYER 165, 166 (2010).
77. The Uniform Law Framework consists of various sets of rules. See Legal Services
Council, Uniform Law, http://www.legalservicescouncil.org.au/Pages/uniform-rules/unif
orm-rules.aspx.
78. See Marietta Auer, The Anti-Network. A Comment on Annelise Riles, 56 AM. J.
COMP. LAW 631, 636-7 (2008).
2017]
The Future of Transnational Self-Regulation
21
C. Trade in Professional Services – The WTO and the
Manifold Preferential Trade Agreements
One notable exception where the interests of professionals meet those of
their governments seems to be the work undertaken by the WTO regarding
progressive liberalization of market access in professional services.
Professional services were among the first sectors that the WTO negotiators
identified as a priority in the 1990s. Professional services had already been
tackled in a working group that was established on May 11, 1990, during the
Uruguay Round negotiations, along with working groups on financial,
transport, and tourism services.79 At the end of the Uruguay Round in 1995, a
Working Party on Professional Services (WPPS) was created whose mandate
was twofold: First, it was instructed to examine and recommend any possible
disciplines, which would ensure that measures regarding qualifications,
licensing, and technical standards do not unduly distort trade in professional
services. Second, as a matter of priority, the WPPS had to concentrate on the
elaboration of multilateral disciplines on the accountancy sector to give
operational effect to specific commitments under the GATS.
Work on accountancy sector was completed on December 14, 1998,
with the adoption by the Council for Trade in Services (CTS) of the
Disciplines on Domestic Regulation in the Accountancy Sector (“the
accountancy disciplines”).80 The accountancy disciplines do not tackle the
substantive content of qualifications or standards in accountancy. Setting
the level of qualifications or the content of technical standards of any kind
to be required of suppliers of accountancy services essentially remains a
prerogative for each Member or the delegated national authority.
Nevertheless, these disciplines do envisage, for the most part, the need to
ensure procedural transparency in matters of licensing and qualification.
The disciplines are not yet binding and the current Doha Round stalemate
renders their entry into force uncertain.
Within the broad range of professional services, the decision to start
with accountancy services was intentional. Two factors are regarded as
determinative in this choice: First, the relevant industry had a great interest
in the development of a sector that was expanding rapidly worldwide and
was deemed a crucial infrastructural element of financial services. Already
79. JV. Reyna, Services in VOL II: COMMENTARY, THE GATT URUGUAY ROUND: A
NEGOTIATING HISTORY (1986-1992) at 2373, (Terence Stewart ed., 1993).
80. Council for Trade in Services, Disciplines on Domestic Regulation in the
Accountancy Sector, WTO Doc. S/L/64 (1998).
22
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
during the Uruguay Round, the United States had proposed the endorsement
of an Annex on Professional Accountancy Services.81 The second factor
relates to the level of integration that the accountancy services demonstrated at
that point of time, which was considerable if compared to other professional
services.82 In preparing those rules on accountancy, the WTO had to consult
with several international organizations such as the International Federation
of Accountants (IFAC), the International Accounting Standards Committee
(IASC), and the International Organization of Securities Commissions
(IOSCO). This was also very helpful for the WPPS work relating to the
preparation of the voluntary Guidelines for Mutual Recognition
Agreements (MRAs) in the Accountancy Sector,83 which matched work
that is also done in the relevant international organizations. On the other
side, the WPPS preferred not to intermingle with standardization issues in
this field, which are dealt with elsewhere.84
The successor of the WPPS, the Working Party on Domestic
Regulation (WPDR) has also been tasked with building bridges with
international professional associations to examine the possibility of
applying the accountancy disciplines to other professions as well.85 Several
professional associations reacted positively or critically.86 Their reaction,
however, shows that they believe in the multilateral process and the
necessity of this type of public rules that couple their efforts towards
further integration within their profession in a globalized world.87 For
81. Working Group on Professional Services, Note on the Meeting of 3-4 October 1990,
GATT MTN.GNS.PROF/W/2 (1990).
82. Cf.Working Party on Professional Services, Functions of the Working Party on
Professional Services in Relation to Accountancy, Note by the Secretariat, ¶ 4, WTO
Doc. S/WPPS/W/1 (1995).
83. Working Party on Professional Services, Guidelines for Mutual Recognition
Agreements or Arrangements in the Accountancy Sector, WTO Doc.
S/WPPS/W/12/Rev.1 (1997). See also Council for Trade in Services, Guidelines for
Mutual Recognition Agreements or Arrangements in the Accountancy Sector , WTO
Doc. S/L/38 (1997).
84. Singapore WTO Ministerial, Singapore Ministerial Declaration, WTO Doc.
WT/MIN(96)/DEC (1996). According to Trachtman, this statement “signals the WTO’s
deference and, in effect, delegation (at least in part), to these organizations. Thus, the
WTO has ‘delegated’ to specific functional organizations the task of establishing
standards to facilitate the free movement of accountancy services.” Joel Trachtman,
Accounting Standards and Trade Disciplines – Irreconcilable Differences?, 31:6 J.
WORLD TRADE 70 (1997).
85. Members were also asked to consult with domestic professional associations on
the same matter.
86. See Working Party on Domestic Regulation – Results of Secretariat
Consultations with International Professional Services Associations JOB(03)/126,
(June 25, 2003) (Informal Note by the Secretariat).
87. The fact that the GATS also applies to rules promulgated by self-regulating bodies may
2017]
The Future of Transnational Self-Regulation
23
instance, in 2003, the Council of the International Bar Association (IBA)
adopted a resolution in support of a system of terminology for legal
services for the purposes of international trade negotiations, but also
general principles for the establishment and regulation of foreign lawyers.88
At the regional level, professional services were part of the trade
agenda from early on. For instance, already in the U.S. - Canada Free
Trade Agreement of 1988, and subsequently in NAFTA in 1994,89 there were
provisions regulating trade in professional services. An Annex on Professional
Services incorporates provisions relating to transparency, the development of
international standards, temporary licensing and review procedures.
Nowadays, virtually all regional trade agreements are aimed at advancing
trade in professional services, as they play a very important role as inputs
of other services and generate important value added. Negotiation of
MRAs can be a particularly useful tool in this regard. In NAFTA, for
instance, MRAs were approved for engineers and architects. In both cases,
professional regulatory bodies came together to liberalize practice across
borders in USA, Canada and Mexico within the spirit of NAFTA Chapter
16. According to the tripartite MRA:90
Architects registered in a jurisdiction are required to
follow the laws and codes in force in each jurisdiction
in which they have been authorized to practice. Architects
practicing outside their own country under this agreement are
limited to providing those services that local architects are
permitted to provide and will only provide those services they
customarily provide in their own country if less than those
services permitted in the host jurisdiction.
By the same token, in ASEAN an MRA allows engineers to move
freely in the territories of the ASEAN signatories provided that they satisfy
the requirements for acquiring the title of the ASEAN Chartered
Professional Engineer (ACPE). There are also agreements that are based
on the concept that a person recognized in one country as attaining the
also be a factor that calls for the proactive involvement of professional associations.
88. Council for Trade in Service, Legal Services, WTO Doc. S/C/W/318 (2010).
89. Professional services were ostensibly included in the agenda because of the architectural
profession. This resulted in an annex proposing that the architectural professions in Canada and
the U.S.A. work towards the establishment of similar standards vis-à-vis accreditation,
internships, examinations and ethics. See OECD International Trade in Professional and
Educational Services: Implications for the Professions and Higher Education, at 4 (2001).
90. Tri-National Mutual Recognition Agreement for International Practice, art. 3.3, Oct. 7, 2005.
24
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
agreed international standard of competence should only be minimally
assessed (mainly for local knowledge) before obtaining registration in
another country party to the agreement. Such agreements are the APEC
Engineer Agreement and the Engineers Mobility Forum Agreement. Both
agreements are largely administered by engineering bodies. This underlines
time and again the role of private actors in the regulation of professions at a
supranational level.
More recently, the chapter relating to trade in services within the TransPacific Partnership (TPP) included an Annex on Professional Services.91
Interestingly, the TPP parties have included only two Annexes in the chapter of
the agreement relating to services, the other one being in the area of express
delivery services.
TPP Parties have agreed to the creation of a Professional Services
Working Group.92 With respect to architectural and engineering services,
the agreement refers to the APEC Engineer and Architect frameworks,
respectively, and calls for the creation of MRAs. Interestingly, following
the NAFTA model, the TPP encourages the implementation of temporary
or project-specific licensing and registration procedures based on the
home country titles and licenses. With respect to legal services, the TPP
recognizes the importance of transnational legal services for trade and
investment and in promoting economic growth and business confidence.
According to TPP, foreign lawyers should be able to practice the law of
their home jurisdiction abroad and participate in commercial arbitration,
conciliation or mediation proceedings.
The open-ended list of
possibilities for transnational supply of legal services and the scope of
cooperation with domestic lawyers appears quite broad.
Thus,
cooperation of the regulating bodies will be of dire need. The role of the
Working Group is indeed to support the professional bodies in liaising
with one another. Progress should be discussed annually. Similar
mechanisms are to be expected in the Transatlantic Trade and Investment
Partnership (TTIP). The EU has proposed, for instance, the creation of a
Committee on the Recognition of Professional Qualification, but again,
no tangible results will be yielded without the active participation of
professional bodies.
91. See Trans-Pacific Partnership, Annex 10-A Agreed on Jan. 26, 2016, https://
www.mfat.govt.nz/assets/_securedfiles/Trans-Pacific-Partnership/Text/10.-Cross-Border-Trade-inServices-Chapter.pdf? [hereinafter TPP Final Text].
92. See TPP Final Text, supra note 91, at art. 10.9.
2017]
The Future of Transnational Self-Regulation
25
IV. The Transnational Dimension of Regulating Professional
Services
A. Two-Dimensional Transnational Private Regulation of
Professional Services
Transnational law of professional services is a dynamic process with
strong normative characteristics led by predominantly private actors.93 The
transnational dimension in professional services should be examined at two
different levels. The first refers to the level of firm; more specifically, large
professional service firms that are active in supplying accountancy and
auditing, legal, management consulting, and advertising services worldwide.
Foreign earnings of those firms sometimes surpass domestic revenues.
International operations of such large firms are typically organized as loose
collections of rather autonomous, locallyowned partnerships.
These
partnerships are linked to an international organism that may have coordinating
responsibilities, among others.
As business strategies become more
intertwined and companies strive for higher returns through diversification,
market boundaries faint. For instance, large accounting firms regularly
provide management advisory services, whereas internationally active law
firms equally are active in areas of tax and trust and estates, very much like
accounting firms. This is not an exclusively developed-country phenomenon;
rather, the quest for new markets leads firms to seek market shares in the
developing world as well, where concentration of power to few may be easier
due to the weaknesses of domestic market structures and antitrust law.
In other cases, professional services have been traditionally
interconnected (or in certain cases, vertically integrated), sometimes
displaying characteristics of complementarity. This is the case of
architectural and engineering services, along with construction services.
Architectural firms prepare blueprints and designs for buildings, whereas
engineering firms provide services relating to planning, design,
construction and management for buildings, installations, civil engineering
works and industrial processes. Consulting engineers, on the other hand,
may work hand in hand with architects from the very early stage of a
project.94 Research is still at its infancy when it comes to deciphering the
interrelations among various professional services and the function of so-
93. Cf. Harold Hongju Koh, Transnational Legal Process, 75 NEB. L. REV. 181, 184 (1996).
94. Cf. Council for Trade in Services, Background Note by the Secretariat:
Architectural Sevices, WTO Doc.S/C.W303, at 3 (Sept. 17, 2009).
26
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
called “professional service supply chains.”95
The second level relates to professional associations. Internationalization of
business gave rise to the creation of international professional bodies that
promote the adoption of business-friendly rules transcending national frontiers to
the benefit of professionals. Individual professionals are only indirectly
represented in these attempts, as their voices are heard exclusively at the level of
each national professional association. In turn, international professional
associations consist predominantly of a group of national associations. In this
sense, rule-making of international professional associations raises questions of
good governance similar to rule-making of international organizations.
However, there may also be associations that follow a more representative or
mixed form of organization. For instance, the legal profession at the global level
is represented not only by the IBA, which is closer to the Anglo-Saxon legal
tradition, but also by the International Union of Lawyers (Union Internationale
des Avocats – UIA). The UIA claims to be the most representative international
association of lawyers in Europe, South America and Africa. Thus, already in
this area of professional services, elements of fragmentation alluding to possible
conflicts and overlaps are present. For our purposes here, it bears noting that
both bodies have international coverage and their membership includes national
professional associations and individual lawyers.96
B. The International Professional Associations
Although the creation of professional associations at the international
level has traditionally improved cooperation and exchange of information
in various professions, notably on issues such as education, professional
qualifications and international standards, this phenomenon has intensified
due to the globalization of business. As business expands beyond national
borders, professional service suppliers equally expand their spectrum of
activity. However, supply of professional services at a transnational level
can be hampered by various impediments notably of regulatory nature.
The need to facilitate access and enhance convergence with respect to
applicable rules, but also to capture activities national laws cannot, led to
the creation of sectoral non-governmental organizations at the international
level. Furthermore, as the locus of legal services supply shifts at the global
95. These are defined as systematic sequences of professional, clerical, and technical
services explicitly set up to provide specific services, such as producing a financial product,
designing a house, or replacing a hip. See Jean Harvey, Professional Service Supply Chains,
42-43 J. OPER. MANAG. 52 (2016).
96. Council for Trade in Services, Background Note by the Secretariat: Legal Services, WTO
Doc. S/C/W/43, at 18 (1998).
2017]
The Future of Transnational Self-Regulation
27
level, the public interest dimension of the practice of law faints, leading
benevolent professionals in efforts to ensure the quality of the legal
services even at the global level.97 We discuss the main features of these
organizations in the areas of law, engineering, and architecture in turn.
As a prelude, a common characteristic of these regimes is their
fragmented way of functioning with high levels of overlap and low levels
of active coordination. Most of these organizations have adopted rules relating
to professional competence, consumer protection, and the protection of public
interest; thereby, showing awareness of professional services having
characteristics similar to experience goods, i.e., significant information
asymmetries. Such rules are typically incorporated in a model code of
ethics, which is intended to inspire domestic professional associations
when they prepare or revise their code of conduct. Accreditation and
(continued) education is an emerging area of significant interaction among
international associations of a given profession and other international
organizations or entities. Such initiatives can potentially lead to mutual
recognition, recognition of equivalent qualifications, and ultimately increased
mobility. Thus, significant legal material is produced and epitomizes a range
of degrees of legal formality; both “soft” and “harder” law seems to be
generated. In that sense, international professional associations constitute
embryonic transnational legal orders.98
i. Legal Services
The legal sector plays an enabling role in the economy. It is no
coincidence that every new Member that joined the WTO in the aftermath
of the Uruguay Round, including China, inscribed commitments in legal
services in its schedule of services commitments. The legal sector has
experienced steady growth in recent years, following the growth of
international trade and the development of new fields of practice, notably
in the area of business and commercial law. Legal firms around the globe
are internationalizing their activities to serve better clients engaged in
activities of a transnational nature. The profession has become global and
lawyers are increasingly required to conduct transactions that cross national
borders and involve several jurisdictions. It is the demand for legal services
that can go beyond national borders that drives the increasing interest of the
legal professionals in the expansion of their possibilities for unhindered
97. See also Cristopher Whelan, The Paradox of Professionalism: Global Law Practice Means
Business, 27(2) PENN STATE INT’L L. REV. 465 (2008).
98. See generally, TRANSNATIONAL LEGAL ORDERS (Terence Halliday & Gregory
Shaffer, eds., 2015).
28
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
international mobility. Multi-jurisdictional advice and fully integrated
services covering all aspects of a business transaction are increasingly
sought after by multinationals. Such phenomena lead to important
structural shifts in the legal market at the national and global levels.99
Having said this, the regulation of the legal profession is still carried
out predominantly at the level of political subdivisions rather than at the
national level. Thus, authority for admission to the profession and
professional discipline often is in the hands of local, state or provincial organs,
be it governmental or professional (in the latter case, through delegation, as
noted earlier). Such fragmentation of regulating the legal profession is often
the result of rent-seeking.100 The superiority of self-regulation in the legal
profession has been questioned based on competition law grounds at least
in the OECD countries, whereby a transition towards separate independent
“umbrella regulators” who focus on the market at the macrolevel (rather
than the individual service supplier) seems to be taking place.101
Important initiatives have been taken at the transnational level to
reduce fragmentation of rules relating, for instance, to corporate structure
or double deontology (referring to the obligation of foreign lawyers to
comply with both the home and host country code of conduct). One of the
most interesting issues on this score relates to restrictions regarding
advertising. For instance, in the host country, contrary to the home
country, advertising of legal services may be prohibited. Such rules may
be applying in a discriminatory manner. For instance, in Denmark, foreign
lawyers face restrictions on advertising that do not apply to local lawyers.
Significant progress has been made under the auspices of the
International Bar Association (IBA) with respect to better transnational
regulation of the legal profession worldwide. The IBA is a federation of
national bar associations and law societies based in New York. It is a truly
international organization with about 200 national professional organizations
and 40,000 individual lawyers as registered members. The IBA Council,
where representatives from Bar Associations sit, is IBA’s governing body.
According to the constitution of the IBA, the IBA aims, inter alia, to
(i) establish and maintain relations and exchanges between Bar
Associations and their members worldwide; (ii) assist in the development
99. See also Deborah Jones Merritt, What Happened to the Class of 2010? Empirical
Evidence of Structural Change in the Legal Profession, MICH. STATE L. REV. 1043 (2015).
100. See Anne Krueger, The Political Economy of the Rent-Seeking Society, 64 AM. ECON.
REV. 64, 291 (1974).
101. See also Alison Hook, Sectoral Study on the Impact of Domestic Regulation on Trade in
Legal Services, 13 (2007), (OECD/World Bank Sixth Services Experts Meeting on Domestic
Regulation and Trade in Professional Services).
2017]
The Future of Transnational Self-Regulation
29
and improvement of the profession’s organization and status worldwide;
(iii) promote uniformity and definition in appropriate fields of law; and (iv)
promote the administration of justice under the rule of law globally.102 To
achieve these objectives, the IBA undertook significant work adopting
resolutions and producing guidelines related to such diverse areas as ethical
standards, conflicts of interest, taking of evidence and party representation
in international arbitration; the recognition and enforcement of foreign
judgments for collective redress; multidisciplinary practices; money
laundering; standards and criteria for recognition of lawyers’ qualifications;
or the regulation of foreign lawyers.103 Notably, two resolutions of the IBA
on General Principles for the Establishment and Regulation of Foreign
Lawyers (adopted in June 1998) and the resolution in Support of a System
of Terminology for Legal Services for the Purposes of International Trade
Negotiations (adopted in September 2003) provide reference points on the
regulation of foreign lawyers advocating the adoption of either a full licensing
approach or a limited licensing approach or an appropriate combination of both
with a view to facilitating legal practice around the world.
The IBA International Code of Ethics was first adopted in 1956. The
latest edition dates back to 1988. The code is not binding on the members
of the IBA and applies to any lawyer of one jurisdiction in relation to his
contracts with a lawyer of another jurisdiction or to his activities in another
jurisdiction. The code includes rules on ethical standards that are common
to most countries on matters such as honour and dignity, independence,
courtesy and fairness to colleagues, financial diligence, conflicts of interest,
contingency fees, unauthorised practice of law, professional liability,
disclosure of confidential information, confidentiality of lawyer-client
communications, respect towards the courts, advertisement and solicitation,
handling, refusal and withdrawal from cases and out of court settlements. It also
includes a rule that binds lawyers who undertake work in a jurisdiction where
they are not full members of the local profession to the ethical rules of the host
country, as well as to those of their home country. The IBA may bring incidents
of alleged violation of the code to the attention of relevant organizations.
In addition, the IBA adopted a ‘Guide for Establishing and
Maintaining Complaints and Discipline Procedures’ to assist national
associations in the creation or revision of their complaints and discipline
procedures. The Guide makes a logical link with the Code of Conduct in
102. See International Bar Association Constitution, art. 1 (May 28, 2011),
http://www.ibanet.org/Document/Default.aspx?DocumentUid=D1E3CF28-BE59-4FC6-96EB4E40156C19CE.
103. For a list of the IBA resolutions, see IBA guides, rules and other free materials,
http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.
30
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
that the implementation of complaints procedures depends on the clarity of
the rules enshrined in the Code of Conduct. The Guide emphasizes the
need for adequately informing the consumers of the possibility of lodging a
complaint; allowing easy, public access to information relating to
complaints; setting specific timelines for handling complaints; and giving
the opportunity to respond to the lawyer concerned. The Guide envisages a
disciplinary framework, whereby the complainant has access to a complaint
handling body, which, if the complaint is well-substantiated, refers the
matter to a disciplinary tribunal. Decisions of the latter shall be appealed
before an appeal tribunal. All three bodies are to be fair, impartial and
independent and may, but need not necessarily, contain nonlawyers.
Thus, the Guide promotes an extra-judicial mechanism that is to run in
parallel with public courts, but crucially does not require the participation of
non-lawyers. For instance, participation of judges or notaries (at least, in those
jurisdictions where notaries are deemed agents of the public interest) could be
a more valuable guarantee of independence.104 According to the Guide, the
following penalties could be imposed to the lawyer: (a) reprimand; (b) fine
and/or restitution order; (c) suspension or revocation of license to practice; (d)
additional courses or further education of the respondent; (e) restricting the
lawyer’s licence to practice.
With over 200 Bar Associations and several thousand individual
members, the International Union of Lawyers (UIA) has similar objectives and
membership.
UIA equally adopted resolutions relating to issues of
professional conduct, foreign legal practice, professional secrecy and
multidisciplinary practices.105 The UIA’s ‘Turin Principles of Professional
Conduct for the Legal Profession on the 21st Century’ of 2002 provide:
C. Role of and Representation by the Bar
Depending on the country, a Lawyer has the duty or
the right to be a member of a Bar or Law Society and
to ensure that the profession is governed by rules laid
down by the representative bodies of which he or she
is a member, and that they are observed.
Provided that the Bar observes the principles set out
104. Cf. Case C-506/04, Wilson v. Ordre des avocats du barreau de Luxembourg, ¶4362, 2006 E.C.R. I-8613, (the Court cast doubts as to the impartiality of a disciplinary body
which is composed exclusively by lawyers).
105. See International Association for Lawyers, Resolutions and Charters, http://www.uianet.
org/en/documentation/resolutions (last accessed on Apr. 15, 2016).
2017]
The Future of Transnational Self-Regulation
31
in the Basic Principles on the Role of Lawyers
endorsed by the UN, 106 Lawyers have the duty to
recognise the Bar’s right to establish such rules and
to ensure compliance by conforming their conduct to
the rules laid down by their own Bar and those of the
other jurisdictions in which they practise.
The UIA has further adopted in 2002 a set of ‘Standards for
Lawyers Establishing a Legal Practice Outside Their Home Country’
which provides, inter alia, for compliance of foreign lawyers with host
country rules of ethics and implies that the host country regulatory
authority should, through the registration of the foreign lawyer, have all
available information to determine and enforce compliance with
applicable standards.
i. Engineering Services
Contrary to the legal sector, engineering has been less bothered with
securing complete regulatory authority. This is because engineers typically
work as employees of private companies, notably due to the need for
significant capital investment.107 However, the emergence of other nongovernmental international professional organizations has influenced
developments in this profession as well. The World Federation of
Engineering Organizations (WFEO) consists of over 90 national and 10
regional members representing some 20 million engineers. It has ten
standing committees hosted in various countries worldwide. In 2001, the
WFEO adopted a model code of ethics to define and support the creation of
similar codes in member institutions. Interestingly, the Code comes with an
interpretation of the Code of Ethics. The Code’s introductory text provided:
These governing principles of the Code of Ethics are
usually presented either as broad guiding principles of
an idealistic or inspirational nature, or, alternatively, as
a detailed and specific set of rules couched in legalistic
or imperative terms to make them more enforceable.
Professions that have been given the privilege and
106. The text refers here to the Basic Principles on the Role of Lawyers, adopted by the
8th United Nations Congress on the Prevention of Crime and the Treatment of Offenders,
Havana, Cuba, August 27, September 7, 1990.
107. Rostain, supra note 60, at 173.
32
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
responsibility of self regulation, including the
engineering profession, have tended to opt for the first
alternative, espousing sets of underlying principles as
codes of professional ethics which form the basis and
framework for responsible professional practice.
Arising from this context, professional codes of ethics
have sometimes been incorrectly interpreted as a set of
“rules” of conduct intended for passive observance. A
more appropriate use by practicing professionals is to
interpret the essence of the underlying principles within
their daily decision-making situations in a dynamic
manner, responsive to the need of the situation. As a
consequence, a code of professional ethics is more than a
minimum standard of conduct; rather, it is a set of
principles which should guide professionals in their daily
work. (Emphasis added).
The most recent WFEO Model Code of Ethics confirms the twofold
objective of a model code of ethics, that is, protect the public, but also the
engineering practitioners from provisions that may restrain commercial
activity. In addition, it identifies four objectives for any code of ethics in
engineering: integrity, competence, leadership, and sustainability.108 More
generally, sustainability has become an increasingly important issue for
WFEO to the extent that a Model Code of Practice for sustainable
development and environmental stewardship was adopted in September
2013. On the occasion of the Paris conference on climate change, WFEO
reflected on the role of engineers in a low-carbon economy. At this
juncture, it adopted a Model Code of Practice on Principles of Climate
Change Adaptation for Engineers during the WFEO General Assembly in
December 2015 in Paris. This Code complements the previous two and
evolves around principles relating to professional judgment, integration of
climate information, and guidance on practice.
Sustainability-related global rules in engineering are growing in
prominence, notably due to the globalization of supply chains.109 As
108. For the latest version of the Model Code of the World Federation of Engineering
Organizations, see http://www.wfeo.org/wp-content/uploads/WFEO_MODEL_CODE_OF_
ETHICS_Final.pdf (last accessed on Apr. 22, 2016).
109. See also Meredith Miller, Corporate Codes of Conduct and Working Conditions in
the Global Supply Chain – Accountability through Transparency in Private Ordering, in
THE BUSINESS AND HUMAN RIGHTS LANDSCAPE – MOVING FORWARD, LOOKING BACK 432
(Jena Martin & Karen Bravo eds., 2016).
2017]
The Future of Transnational Self-Regulation
33
production is outsourced, leveling the playing field in supplying
engineering services is necessary, as the recent collapse of the eight-story
Rana Plaza building dramatically demonstrates.110 Such tragic events also
emphasize the need for more regular checks by Western investors of facilities,
buildings and infrastructure that is used for their production, perhaps through
commissioning engineers from their home countries. In addition, growing
internationalization calls for more convergence regarding educational
standards and professional qualifications.
Since the 1980s, national institutions and other associations have
attempted to establish systems for accrediting engineering courses and
assessing the professional competence of engineers for independent
practice. The most well-known examples of this cooperation include the
Washington Accord, which is a constitutive part of the International
Engineering Alliance (IEA). The Washington Accord is an early example
of a reciprocal agreement that was reached by engineering organisations
representing Australia, Canada, Ireland, Hong Kong, Japan, New Zealand,
Singapore, South Africa, South Korea, Taiwan, Turkey, Malaysia, the
United Kingdom and the United States. In 2014, Sri Lanka and India
joined the Accord. The Accord recognises the equivalency of the national
accreditation mechanisms in these countries and thus graduates in these
countries are considered as having met the academic requirements for entry
to the practice of engineering.111 Other parts of the education of engineers
are covered by the Sydney Accord (engineering technologists or
incorporated engineers), signed in 2001, and the Dublin Accord
(engineering technician), signed in 2002.
Other examples of cooperation include the European Federation of
National Engineering Organizations (FEANI), the Engineers Mobility Forum
and the APEC Engineer Monitoring Committee. These constitute a global
network working on standards for engineering degrees and professional
engineering practice.112 For instance, FEANI adopted standards and rules
relating to the assessment of competence of professional engineers with a
view to increase mobility of engineers in Europe. Notably the Engineers
Mobility Forum agreement created the framework for the establishment of
an international standard of competence for professional engineering. This
110. Jim Yardley, Justice Still Elusive in Factory Disasters in Bangladesh, N.Y. TIMES, June
29, 2013.
111. See Washington Accord, IEA, http://www.ieagreements.org/Washington-Accord/ (last
accessed on May 15, 2016); also John Mallea, “International Trade in Professional and
Educational Services: Implications for the Professions and Higher Education,” at 4-5, (1998).
112. Cf. Peter Greenwood, WFEO, Mobility of Engineering Professionals, Information Paper
on Mobility Prepared for the WFEO Standing Committee on Education and Training (CET) (Oct.
20, 2008).
34
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Forum was repealed by the International Professional Engineers Agreement
(IPEA), a multinational, open agreement with the same critical objective as
the previous Forum.113 The standard applied is the same as the APEC
Engineer Agreement. However, non-APEC members, such as the United
Kingdom or Ireland, are parties to the IPEA. WFEO, in turn, has been
working on the preparation of a policy on accreditation of courses and
mobility of engineering professionals, which would complement the abovementioned initiatives.
There are other international organizations that are concurrently active in
promoting the engineering profession. Most notably, the Institute of Electrical
and Electronics Engineers (IEEE), which has over 400,000 members in 160
countries and covers electrical and electronics engineers, or the International
Federation of Consulting Engineers (FIDIC), which focuses entirely on
consulting firms. The World Council of Civil Engineers focuses on civil
engineers who represent around 50 percent of all engineering organizations
worldwide. The Institution of Civil Engineers (ICE), although established in the
UK, represents about 90,000 members from more than 160 countries worldwide.
One interesting aspect of the above-mentioned international initiatives
is that they have adopted codes of conduct, which, other than making
reference to education, competence and integrity of the engineers,
underscore the importance of combating corruption in the profession,
particularly in the materialization of construction projects. For instance,
FIDIC has prepared and encourages the implementation of an ‘Integrity
Management System’, focusing on preventive action to fight corruption.
Guidelines in this regard were first adopted in 2001. In 2006, FIDIC
adopted similar guidelines specific to government procurement. In 2011,
the first edition of policies and principles regarding the FIDIC Integrity
Management System (FIMS) was published. 114
ICE also adopted a Code of Professional Conduct, violation of
which may lead to disciplinary action against a given member. The ICE
disciplinary mechanism includes the Professional Conduct Panel and the
Disciplinary Board. The former is in charge of investigating all
allegations against ICE Members that are accused of inappropriate
conduct. Serious cases are to be forwarded to the Disciplinary Board
for formal adjudication. According to By-law 40, the Disciplinary
Board can impose the following sanctions: compliance with certain
requirements regarding the member’s future professional or business
113. IEA CONST., available at http://www.ieagreements.org/Agreement-ConstitutionsVersion-1.pdf.
114. See also INT’L FED’N OF CONSULTING ENG’RS, http://fidic.org/node/777 (last visited
May 4, 2016).
2017]
The Future of Transnational Self-Regulation
35
conduct; fines up to a maximum of £2,000; admonition; severe reprimand;
suspension; and expulsion. According to By-law 41, appeal to an independent
tribunal is possible in theory under certain circumstances.
ii. Architectural Services
The International Union of Architects (UIA) consists of national
associations from 130 countries and territories. It is a federation of
national professional organizations called Member Sections. The UIA
maintains an open electronic database with information about the industry
in each Member Section and in order to assist those architects who
practice their profession at the international level. In this respect, the
UIA has been quite active in the field of facilitating movement of
architects at the international level. In 1999, the UIA General Assembly
unanimously agreed on an Accord on Recommended International
Standards of Professionalism in Architectural Practice and a set of
Recommended Guidelines, which offer a basis for mutual recognition of
architectural competences at the international level. 115 In addition, the
UIA has developed, jointly with UNESCO, a Charter for Architectural
Education, which sets out broad minimum standards. 116 According to
UIA, the latter should be regarded as the minimum criteria for
architectural education.
Previously, the UIA had adopted an International Code of Ethics on
Consulting Services, which should ostensibly constitute “the common
standard of conduct for all professionals performing consulting services
in all nations.” Member Sections are encouraged to introduce into their
own codes of ethics the recommended Accord Guidelines mentioned
earlier and a requirement that their members adhere to the codes of ethics
in force in the host country, provided that they are not prohibited by
international law or the home country laws. Indeed, Article 9 of the Code
provides that the architect delivering professional services abroad shall
abide by the host country’s professional regulation laws and adhere to the
code of ethics that domestic professionals apply. Interestingly, in its
Article 10, the Code provides:
(1) The common objectives of all professional
organizations are to establish and promote the highest
115. Most recently revised in 2014, the Accord is available at: http://www.uia.archi/sites
/default/files/AIAS075164.pdf (last accessed on May 2, 2016).
116. The most recent revised version can be found at: http://www.uia.archi/sites/
default/files/charte-en.pdf (last accessed on May 2, 2016).
36
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
standards of ethical conduct and excellence in the
practice of the professions, to regulate the professional
conduct of the members of the professions and to
cooperate with their allied professional organizations.
(2) In line with the foregoing objectives, it shall be
mandatory upon a professional organization to take
appropriate action on any formal complaint for unethical
conduct filed against any member of its profession by a coprofessional, a client, a professional organization or a
government regardless of the residence of the
complainant. (Emphasis added).
At the national level, the Accord encourages the creation of
professional bodies if they do not exist. It further underlines the
importance for these bodies to adhere to the UIA international standards,
the UNESCO-UIA requirements, and the UIA Code of Ethics. Such bodies
should be governed in an open and transparent manner and are expected to
promote the interests of consumers, architects, and the general public.
The Accord and Recommended Guidelines are deemed nonbinding
documents for the consideration of the individual national Member
Sections, and the UIA cannot enforce those documents. However, their
influence is apparent. For instance, Korea expanded the required
architectural education from four to five years; the Architects’ Council of Europe
revised their recommended Code of Ethics based on the UIA mode; and the
MRA relating to architects under NAFTA uses the definition of architect
included in the UIA Accord.117 In addition, UIA was one of the few
international professional associations to submit a proposal for a WTO GATS
Annex on Domestic Regulation to allow for the dismantlement of unnecessarily
excessive barriers to trade in professional/architectural services.118
V. Private Enforcement and Judicial Review
Private enforcement has been a pervasive feature of the existing social
and economic system for several decades. Whereas the State assists by
establishing and maintaining a court system, the most important part of
117. See Russell Keune, “Architectural Services in Global Trade in Professional Services,”
paper presented at the OECD/World Bank Sixth Services Experts Meeting on Domestic
Regulation and Trade in Professional Services, at 24, (Feb. 2007).
118. See the proposal of 2006 at: http://www.ace-cae.eu/uploads/tx_jidocumentsview/A
G207UIADomreg.pdf (last accessed on May 2, 2016).
2017]
The Future of Transnational Self-Regulation
37
enforcement is informal, also driven by the “latent threat of withdrawing
future business from the violator.”119 Enforcement of private rules in
professional services reveals an interaction of bodies, be it public, private
or hybrid.
In professional services in which self-regulation has
traditionally prevailed, such as the legal profession, the creation of
disciplinary bodies consisting mainly of fellow professionals is common.
It is in a second step and in more significant cases of professional
misconduct that the participation of a “public authority” representative,
such as a judge, occurs. In other cases, referral of the entire case to a public
court may be stipulated in the statute of a given professional organization. For
instance, the rules of a given professional association may offer the possibility of
appeal to ordinary courts against certain decisions made by disciplinary bodies of
the association. In other cases, notably claims raised by consumers, it is public
courts that will be deciding on issues of fault and liability. Finally, once the
remedy of having recourse to the disciplinary bodies of a given professional
association is exhausted, recourse to the ordinary judicial system is always open
for the person negatively affected. As mentioned earlier in the case of the UK,
the State in certain cases may prefer to delegate the most insignificant cases to
special agencies that oversee the work and activities of the professional bodies.
Initially regarded as an intervention in the matters of professional
associations, judicial review of decisions by private professional associations
became a standard procedure in case of continued complaints. This can happen
even after the exhaustion of disciplinary processes within a given professional
association, notably with regard to the imposition of sanctions and the admission
to the profession. In both cases, the notion of public interest and antitrust-related
considerations are important issues for the State to keep an eye on. Judicial
review in this case would entail a balance between incommensurables whereby
judges ultimately make implicit value judgments.
When a given situation is treated by the disciplinary body of a given
professional association, it seems that the enforcement pyramid becomes
relevant.120 Regulatory approaches would begin at the bottom of the pyramid for
low-profile cases necessitating a warning or soft forms of notice, and escalate
towards the imposition of fines and/or incapacitation in response to compliance
failures. According to Ayres and Braithwaite,121 governments should allow selfregulation to industries in the first instance, but the State should move on through
enforced self-regulation to command regulation with (discretionary and
119. William Landes & Richard Posner, The Private Enforcement of Law, 4 J. LEGAL
STUD. 1 (1975).
120. IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION – TRANSCENDING THE
DEREGULATION DEBATE 38 (Oxford University. Press 1995).
121. Id.
38
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
subsequently with nondiscretionary) punishment if the goals are not met. Thus,
the regulator shall be able to move up and down the pyramid or even recover the
regulatory power that had been delegated to a professional association depending
on the gravity of the situation. This last element can also be part of a metaregulation approach, whereby governmental authorities deliberately seek to
induce private bodies to develop their internal self-regulatory responses to
challenges.122 However, an overemphasis on punitive strategies can render
voluntary compliance at the bottom of the pyramid impossible.123
A. Legal Services
Private enforcement in the legal profession entails, for the most part,
the implementation of legal ethics rules against misconduct or fraudulent
and deceptive practices of lawyers. Typically, codes of ethics would entail
a series of sanctions, which, depending on the type of behaviour and
severity of the offense, would escalate up to the level of indefinite
expulsion from the Bar. Sanctions more often than not include: admonition,
reprimand, censure, suspension from practice, or disbarment. Admonition is
usually a private discipline, whereas reprimand can be private or public.
Censure, suspension and disbarment are public disciplinary sanctions.
In the United States, self-regulation in the legal profession co-exists
with state regulation. Codes of ethics are typically enforced by the
respective state’s supreme courts, which have acted as the ultimate
gatekeepers. Thus, rules of professional conduct in the legal profession are
in the end considered as rules of the supreme court of a given state, and
thus applied under the aegis of the state judiciary.124 However, in practice,
such rules have been prepared by the state bar and are typically based on
the Model Rules of Professional Conduct set out by the American Bar
Association (ABA). In several states, disbarment, which is the most severe
sanction, can be decided only by the state’s supreme court.125
Nonetheless, the rest of the sanctions have been traditionally enforced
by disciplinary agencies that either operate within the judicial branch or are
part of the state bars. Thus, for some time, state bars were in charge of
122. Coglianese & Mendelson, supra note 58, at 147.
123. Richard Baldwin & Julia Black, Really Responsive Regulation, 71 MODERN L. REV.
59 (2008).
124. In general, Supreme Courts have ultimate jurisdiction for admission to the practice of
law, the discipline of persons so admitted, and all other matters relating to legal practice. See
for instance, OH Const. art. §4.02(B)(1)(g).
125. It bears noting that disbarment is not necessarily permanent, as reinstatement is
possible in some states.
2017]
The Future of Transnational Self-Regulation
39
conducting investigations, holding hearings and imposing a range of
disciplines. This led to the proceedings becoming confidential, somehow
implying that there was no public interest involved in cases brought against
misbehaving lawyers.
However, over the years it became clear that the bars largely failed to
run effective disciplinary mechanisms, with more than 90 percent of
complaints against lawyers being dismissed – sometimes without any
investigation.126 In addition, corporate lawyers became so intertwined with
business that they became subject to federal regulation in important areas
such as securities or taxation. In the case of corporate practice, ethics
regulation is federalized.127 In such areas of significant federal interest,
federal regulation treats corporate lawyers as one of a class of similar
service providers.128
Thus, more open mechanisms have emerged in which, nonetheless,
lawyers, and less the organized state bars, continued to play an essential
role. For instance, in New Jersey, legal ethics issues will first be raised
with one of the seventeen district ethics committees around that state.129
Such committees are composed of three members, two of whom are
lawyers. Decisions of the committees and the Office of Attorney Ethics
can be reviewed before the Disciplinary Review Board (DRB) of the
supreme court of New Jersey, which conducts a de novo review. The DRB
consists of nine members appointed by the supreme court.130 Five of them are
attorneys, one member is a retired judge and the remaining three members are
nonlawyer, public members. The Board’s decision must be reviewed by the
state’s supreme court only in the case of a decision recommending disbarment.
According to Rule 1:20-16(b) of the New Jersey Court Rules
Governing Attorney Discipline, in all forms of discipline other than
disbarment, the recommendation of the Board becomes final on entry of an
order by the supreme court, unless the latter grants one of the parties leave
to appeal. The state’s supreme court decision can be appealed before the
126. See Rostain, supra note 60, at 180.
127. This is, for instance, the case with the Sarbanes-Oxley Act: 15 U.S.C. § 7245 (Supp.
III 2003). For a critical review of lawyers’ objections against such pieces of legislation, see
William H. Simon, After Confidentiality: Rethinking the Professional Responsibilities of the
Business Lawyer, 75(3) FORDHAM L. REV. 1453 (2006).
128. see also Laurel Terry, The Future Regulation of the Legal Profession: The Impact of
Treating the Legal Profession as “Service Providers.” JOURNAL OF THE PROFESSIONAL
LAWYER 189 (2008).
129. Complaints relating to advertising shall be raised with the Attorney Advertising
Committee.
130. Cf ABA Model Rules for Lawyer Disciplinary Enforcement, more recently
amended in 2002.
40
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
United States Supreme Court. Disciplinary proceedings are public, but all
fee arbitration proceedings are confidential.131
A Random Audit
Compliance Programme is also pursued, which allows the identification of
otherwise unknown attorney misconduct.
The state’s supreme court is free to follow its own argumentation,
whereas the views of the bodies previously dealing with a given case
merely constitute recommendations. For instance, in Zauderer, the United
States Supreme Court rejected the appellant’s claimant that his due process
rights were violated because the Ohio Supreme Court relied on a theory
that was different from the one brought forward by the Board of
Commissioners on Grievances and Discipline or the Office of Disciplinary
Counsel. The United States Supreme Court emphasized that, under the law
of Ohio, the Board has no authority to impose discipline, but simply
recommend discipline to the state’s supreme court, which is the ultimate
authority responsible for bar discipline according to the Ohio state
constitution (and, obviously under all state constitutions).132
As an alternative to civil litigation, in the state of New Jersey, the
possibility of fee arbitration is offered when there is disagreement with
respect to fees. This programme handled more than 1,795 cases involving
more than $13 million in legal fees in 2014.133 If parties choose this option
instead of civil litigation, they are presumed as bound by the decision of the
arbitrators. Just as with the DRB, most members in this institution are still
attorneys. Typically, the fee arbitrator committee will consist of three
lawyers or two lawyers and one public member.
Although important steps were made to improve the openness of
disciplinary mechanisms, the situation is still regarded as unsatisfactory in
several States.134 Lawyer discipline mechanisms have been criticized for
their lack of transparency at least since the 1970s and this has led to an
increased involvement of the judicial branch as a guarantee of
independence. The ABA McKay Commission, when examining the lawyer
discipline mechanisms, found that “the Commission is convinced that
secrecy in discipline proceedings continues to be the greatest single source
of public distrust of lawyer disciplinary systems.”135 In addition, in several
131. Information on all disciplinary cases since 1984 is to be found at:
http://www.judiciary.state.nj.us/oae/discipline.htm (last accessed on May 10, 2016).
132. Zauderer v. Office of Disc. Counsel, 471 U.S. 626, 655 (1985).
133. See Stuart Rabner & Charles Centinaro, State of the Attorney Disciplinary System
Report 2014, 45.
134. Leslie Levin, The Case for Less Secrecy in Lawyer Discipline, 20 GEORGETOWN J. OF
LEGAL ETHICS 1 (2007).
135. ABA Commission on Evaluation of Disciplinary Enforcement, Lawyer Regulation for a
2017]
The Future of Transnational Self-Regulation
41
cases, consumers are not adequately informed of recidivists, who may
actually have been sanctioned several times before they are disbarred, if at
all. Indeed, in New Jersey, several lawyers have received public discipline
in more than one instance.136 In Louisiana, a study suggested that between 1975
and 2000, 85 percent of the disbarred lawyers who applied for reinstatement
succeeded and 44 percent of those lawyers were subsequently disciplined.137
Furthermore, it appears that sanctions are imposed in an unbalanced manner in
that solo or small-firm lawyers are disproportionately prosecuted.
Nowadays, important steps towards increased transparency were
made, with an enhanced involvement of the state judiciary. In California,
for instance, the State Bar investigates complaints of attorney misconduct
and, if necessary, files formal charges with the State Bar Court. This court
consists of independent professional judges and no attorneys are involved.
The State Bar Court has the power to discipline lawyers for lesser offenses
and recommend to the State’s Supreme Court suspension or disbarment for
more serious crimes. Again, the extent to which the disciplinary system is
public varies among states. Complaints against lawyers in Florida, New
Hampshire, Oregon and West Virginia are treated as a matter of public record.
In 2009, over 88,000 complaints were received by the state
disciplinary agencies. However, the majority of the complaints filed were
dismissed after investigation during the same period.138 More than 2,000
lawyers were privately sanctioned, whereas the number of lawyers who
were publicly sanctioned was slightly below 5,000. Thus, sanctions have
become increasingly public, thereby serving an important function of
transparency, openness, and consumer protection from laggards. However,
downsides are also present in that reputation costs can be high, notably for
lawyers who in the end were not disciplined.139
Many times, disciplinary proceedings run in parallel with civil
litigation or criminal proceedings. For instance, In the Matter of Marc F.
Desidario, the New Jersey Supreme Court disbarred Mr. Desiderio as a
result of his criminal conviction by the United States District Court for the
Southern District of California. Mr. Desidario was accused of money
laundering, aiming to conceal the operations of a substantial marijuana
New Century: Report of the Commission on Evaluation of Disciplinary Enforcement, 33 (1992).
136. See Stuart & Rabner, supra note 133, at 18ff.
137. Levin, supra note 134, p. 3 (citing Terry Carter, ‘Bounced from the Bar: Lawyers Who
Lose Their Licenses for Fraud or Other Misconduct Can Win Reinstatement, If They Practice in
the Right State,’ ABA Journal, October 2003, p. 56).
138. ABA Survey on Lawyer Discipline Systems 2014, Charts I and II.
139. In the United States, there is also a website which allows ratings of lawyers. See for
instance: www.lawyerratingz.com.
42
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
distribution organization. The New Jersey Supreme Court temporarily
suspended the attorney, but only after he pleaded guilty to conspiracy to
commit money laundering before the United States District Court for the
Southern District of Florida.140
In Ohralik, a case that was subsequently handled by the United States
Supreme Court,141 at stake was the behaviour of an Ohio lawyer, who
managed, through face-to-face solicitation of two car accident victims, to
sign contingent-fee arrangements with them. Eventually, both victims
discharged the attorney, but he succeeded in obtaining a share of the
driver’s insurance recovery in settlement of his lawsuit against them for
breach of contract. Later, both victims filed grievances with the Ohio State
Bar Association for violation of the rules prohibiting unsolicited
recommendation or acceptance of employment for members of the Bar.142
The Bar’s grievance committee recommended a public reprimand, which
was later endorsed by the Disciplinary Board of the Ohio Supreme Court.
On appeal, the Ohio Supreme Court adopted the Board’s findings, but
increased the Board’s recommended sanction of a public reprimand to an
indefinite suspension.
In Europe, the structure of disciplinary mechanisms varies. The
CCBE recommends that any disciplinary proceedings in the legal
profession be independent vis-à-vis state authorities. Rather, the primary
responsibility of the conduct of disciplinary proceedings should preferably
lie with the Bar or the Law Society. Having said this, the State may set the
framework within which disciplinary proceedings should function.143
In England and Wales, the Legal Services Act of 2007 constitutes a
major overhaul of the regulation of the legal profession and a dramatic
transformation of the self-regulatory model. The Act permits, inter alia,
nonlawyers to invest in law firms. Thus, UK-based firms can seek outside
capital. In addition, the Act allows the creation of Alternative Business
Structures (ABS),144 alias multidisciplinary practices, whereby lawyers can
join forces with nonlawyers such as accountants or tax consultants.145 By
140. See In the Matter of Desiderio, 927 A.2d 560 (2007) and In the Matter of Desiderio, 963
A.2d 810 (2009).
141. See infra Section III.
142. Rules DR 2-103(A) & DR 2-104(A) of the Ohio Code of Professional Responsibility
(1970).
143. See CCBE Recommendations on Disciplinary Process for Legal Professions,
http://www.ccbe.org/fileadmin/user_upload/NTCdocument/CCBE_Recommendations1_119
0034926.pf (last visited Mar. 15, 2016).
144. The Solicitors Regulation Authority licensed the first ABS in March 2012.
145. This is prohibited in the US and in several EU MS. For an early assessment of the
effects on competition that this discrepancy may have, see Anthony Davis, Regulation of the
2017]
The Future of Transnational Self-Regulation
43
2014, over 250 ABSs were licensed in the UK, accounting for a significant
share in the legal market.146
In this new regulatory framework, the Solicitors Regulation Authority
(SRA), established in 2007, is the independent regulatory body of the Law
Society of England and Wales. The new SRA Code of Conduct, adopting
an outcomes-focused regulatory approach, came into force in 2011.
According to the new framework, all authorized legal firms in the UK will
need to appoint compliance officers for legal practice (COLPs, must be
qualified lawyers) and for finance and administration (COFAs, not
necessarily lawyers), who will be responsible for risk management and
proper governance.
In principle, the SRA is the first body that will take up a complaint of
misconduct against a solicitor.147 The SRA has vague standards as to
whether decisions against solicitors will be published or not, depending on
whether publication promotes the public interest (which the SRA decides
unilaterally upon). Published decisions include: decisions to fine or
rebuke, decisions to prosecute at the Solicitors Disciplinary Tribunal
(SDT), decisions to control how a firm or an individual practices, decisions
to close a practice, and agreed outcomes with firms or individuals.
The SDT is constituted as a Statutory Tribunal under the UK
Solicitors Act 1974. Prosecution to the SDT is done by the SRA and is
necessary in severe cases such as striking a solicitor from the roll of
solicitors. The SDT also decides for reinstatements, i.e. restorations to the
roll of solicitors. It has 53 members, 34 of which are solicitors. These
solicitors should have no connection with the SRA. Publication of
outcomes comes late in the procedure. Decisions of the SRA to prosecute
will be published only when the SDT has certified that there is a case to
answer. Orders delivered by the SDT can be appealed before the High
Court. The SRA can also appeal against a decision by the SDT.
For instance, In the Matter of Pawan Vikram Sharma,148 at stake was
the misconduct of Mr. Sharma who, inter alia, forged signatures on five
occasions during a transaction and sent on his firm’s letterheaded paper to
facilitate a personal transaction. Despite admitting that the allegations were
Legal Profession in the United States and the Future of Global Law Practice, 19:2
PROFESSIONAL LAWYER 1 (2009).
146. See Solicitors Regulation Authority, Research on alternative business structures
(ABSs) – Findings from surveys with ABSs and applicants that withdrew from the licensing
process, (May 2014).
147. The UK regulatory framework also includes a Legal Ombudsman and an Office of
Legal Complaints.
148. See Solicitors Disciplinary Tribunal, In the Matter of Pawan Vikram Sharma, No
10079-2008.
44
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
true, Mr. Sharma denied that he had acted fraudulently or dishonestly. The
SDT initially found that, despite Mr. Sharma’s dishonesty, the fact that no
public harm occurred and Mr. Sharma was the beneficial owner of 100 percent
of the shares in the company on behalf of which he wrote on the firm’s
letterhead made this case exceptional. For these reasons, the SDT disciplined
Mr. Sharma with a three-year suspension from practice as a solicitor.
The SRA believed this sanction to be excessively lenient and therefore
appealed before the High Court arguing that the appropriate sanction in this
case would be disbarment.149 The High Court considered the Salsbury v.
Law Society150 test to find that it was not applicable in the end. Under the
circumstances of the case at issue, dishonesty from a solicitor could not be
permissible, as Mr. Sharma had repeatedly acted dishonestly and no
exceptional circumstances could justify such behaviour. Thus, the High
Court concluded that a striking-off order from the roll was appropriate.
The CJEU has also reviewed manifold decisions by professional
bodies to protect the fundamental freedoms in accordance with the treaties,
notably the freedom of establishment set out in Article 49 of the Treaty on
the Functioning of the European Union (TFEU) and the freedom to provide
services enshrined in Article 56 TFEU. Recognizing that the private bodies
can hamper market access and that the rules of free movement can have
horizontal effect, that is, they can be invoked against nongovernmental bodies
and individuals,151 the CJEU revolutionized the interpretation of the EU Treaties.
In Wilson, for instance, at issue was the Luxembourg Conseil d’Ordre
(Bar Council) refusal to register Mr. Wilson in the Bar Register, as the Bar
Council was unable to determine Mr. Wilson’s language knowledge. Mr.
Wilson decided not to appeal before the Bar’s Disciplinary and
Administrative Committee, but to the Administrative Court. The latter,
however, found that it had no jurisdiction. Subsequently, Mr. Wilson
appealed to the Higher Administrative Court, which decided to seek a
preliminary ruling by the CJEU. Mr. Wilson challenged the independence
of the disciplinary bodies of the Bar to substantiate his claim that the
disciplinary proceedings violated the Directive 98/5 requiring that refusals
of registration to the Bar be reviewed by a court of tribunal as defined by
EU law. The CJEU found that the condition of independence was not met.
According to the CJEU:152
149. Solicitors Regulation Authority v Parwan Vikram Sharma (2010) QBD (Admin).
150. EWCA Civ 1285, (2008) 1 WLR 1286 (2009).
151. See, for instance, Case 41/74, Van Duyn (1974) E.C.R. 1337, ¶4-8; and C-281/98,
Angonese (2000) E.C.R. I-4139.
152. C-506/04, Wilson (2006) E.C.R. I-8613, ¶53-55.
2017]
The Future of Transnational Self-Regulation
45
The guarantees of independence and impartiality require
rules, particularly as regards the composition of the body
and the appointment, length of service and the grounds for
abstention, rejection and dismissal of its members, in order
to dismiss any reasonable doubt in the minds of individuals
as to the imperviousness of that body to external factors and
its neutrality with respect to the interests before it . . .
In this case, the composition of the Disciplinary and
Administrative Committee . . . is characterised by the
exclusive presence of lawyers of Luxembourg nationality. . .
As regards the Disciplinary and Administrative Appeals
Committee, the amendment made . . . confers overriding
influence on the assessors, who must be registered on the
same list and presented by the Bar Councils of each of the
Bar Associations referred to in the preceding paragraph of
this judgment, as compared with the professional magistrates.
. . .the Bar Council, whose members . . . are lawyers
registered in List I of the Bar Register, thus has its decisions
refusing registration of a European lawyer reviewed at first
instance by a body composed exclusively of lawyers
registered on the same list and on appeal by a body
composed for the most part of such lawyers.
In those circumstances, a European lawyer whose
registration on List IV of the Bar Register has been refused
by the Bar Council has legitimate grounds for concern that
either all or the majority, as the case may be, of the
members of those bodies have a common interest contrary
to his own, that is, to confirm a decision to remove from the
market a competitor who has obtained his professional
qualification in another Member State, and for suspecting
that the balance of interests concerned would be upset. . .
Thus, the Court was concerned about the impartiality of such private
enforcement bodies. Another element weighing against the Luxembourg Bar
was that subsequent judicial review by the domestic Supreme Court was limited
to issues of law according to the relevant legislation. However, in such cases,
Hastings Int’l & Comp. L. Rev.
46
[Vol. 40:1
courts should have full jurisdiction to make an independent, de novo review.153
As private enforcement bodies de facto exercise judicial functions, the
CJEU has accepted early on that they can have recourse to the preliminary
reference mechanism in case of doubt as to the interpretation of EU law. In
Broekmeulen, the CJEU had to examine a refusal of the General
Practitioners Registration Committee, a body established by the Royal
Netherlands Society for the Promotion of Medicine, to register as general
practitioner a doctor who obtained his diploma in Belgium.
In that case, interestingly, the Appeals Committee of the private body
sought a preliminary ruling by the CJEU. As a preliminary issue touching
upon the admissibility of the application, the CJEU had to decide whether
the Committee could come under the definition of a tribunal or court. The
CJEU acknowledged that, in the case at issue, the private body was fairly
powerful and access to ordinary courts was in fact nonexistent. The CJEU
held that the Appeals Committee must be regarded as a court or tribunal and
therefore have access to the preliminary ruling proceedings of the CJEU
relating to the interpretation of EU law. Two elements weighed heavily in the
minds of the judges: first, that this body operates with the consent and
cooperation of the public authorities; and second, that it delivers decisions
that are in fact recognized as final after an adversarial procedure.154
B. Engineering
Codes of ethics for the engineering profession in the US existed since
the beginning of the twentieth century and initially aimed to regulate the
professional ethos. Few years later, European engineering associations,
notably in Germany (e.g. DIN, VDI), have started becoming powerful and
produced legally binding rules for technological design. In the United States,
regulation and a fortiori enforcement against misconduct of engineers is rather
state-centered. This implies that mobility already at the federal level can be
challenging, notably as in some States generic licenses are issued, while in
others, licenses for specific disciplines of engineering (for instance, civil
engineering or mechanical engineering) are delivered. Exams are typically
organized by the National Council of Examiners for Engineering and
Surveying (NCEES) to which each state’s engineering board is represented.
In some states, a board may be responsible for identifying misconduct
in engineering and related professions, such as architecture. Thus, in
Missouri, the Missouri Board for Architects, Professional Engineers, and
153. Cf. Capital Bank AD v. Bulgaria, 2005, E.C, H.R., no. 49429/99, ¶98-104.
154. Case 246/80, Broekmeulen v Huisarts Registratie Commissie, 1981 E.C.R. 2311.
2017]
The Future of Transnational Self-Regulation
47
Professional Land Surveyors and Landscape Architects are in charge of
ensuring the adherence to the relevant code of conduct. In a recent case,
the issue was whether a licensed professional engineer, Mr. Bird, should be
disciplined because he affixed his seal to building plans that were prepared
in large part by a licensed architect whose work was not done under the
engineer’s immediate personal supervision as the relevant Board
regulations required.155 Mr. Bird agreed to complete plans and drawings
for a commercial building project for Landmark Builders of Blue Springs
after the architect’s refusal to complete them. Landmark had previously
refused to pay an additional fee to the architect for the completion of the
drawings. The revision of the drawings was necessary because the
Planning Commission rejected them.
The Administrative Hearing
Committee (AHC), before which the Board filed a complaint, found that
Mr. Bird’s behaviour was faulty and subject to discipline because he did
not supervise the prior work of the architect. The Board subsequently
suspended Mr. Bird for three years to be followed by a year of probation.
Mr. Bird asked for a review before the Cole County Circuit Court which,
after finding serious errors in the AHC’ decision, remanded rehearing.
On appeal, the Court of Appeals dismissed Mr. Bird’s appeal.
Ultimately, the matter was brought before the Missouri Supreme Court.156
The Court started by underscoring the breadth of its judicial review: “the
Court’s inquiry may extend to a determination of whether the action of the
agency is in violation of constitutional provisions, is in excess of the
statutory authority or jurisdiction of the agency, is unsupported by competent
and substantial evidence upon the whole record, is, for any other reason,
unauthorized by law, is made upon unlawful procedure or without a fair trial, is
arbitrary, capricious or unreasonable, or involves an abuse of discretion.”
The Court went on to hold that the purpose of professional regulation
is the protection of the public and not of the licensees. Therefore, any
financial losses or nullification of property interest of the architect are
irrelevant. Rather, the regulations at issue do nothing more than impose an
affirmative duty on licensees to ensure the quality of the work they
complete and to accept personal responsibility for documents they seal, a
duty that Mr. Bird actually fulfilled, just as he assumed full responsibility
for the entire project. Indeed, the ultimate purpose of the regulations was
to assign personal liability upon professionals in the case of defect. For
these reasons, the Court reversed the AHC decision and cleared Mr. Bird.
155. Regulations 4 CSR 30-3.030(7) and 4 CSR 30-13.010, which subject Mr. Bird to
discipline under section 327.441.2(6).
156. Bird v. Missouri Board of Architects, Professional Engineers, Professional Land
Surveyors and Landscape Architects, 259 S.W. 3d 516 (2008).
48
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Thus, judicial review against decisions by professional disciplinary
bodies can be scrutinized thoroughly when the matter at issue pertains to
the legal interpretation of professional regulations. As the Missouri
Supreme Court put it in Bird: “Occupational licensing boards deserve
deference only in cases that require technical expertise in their respective
fields.” Under this spectrum, the role of judicial review shall be regarded
as a complementary one, providing guidance on legal questions, where the
professional bodies lack expertise.
Few years earlier, in Duncan v. Missouri Board for Architects,
Professional Engineers and Land Surveyors, at issue was a failure by a
certified engineer to review and check plans and drawings for which the
engineer was legally responsible. The Missouri Court of Appeals was
called upon to decide on a case whereby the license of a supervising
engineer was revoked because he affixed his seal to structural drawings that
were the basis for the fabricator’s shop drawings that provided for a defective
design.157 More specifically, because of the defective design, the second and
fourth floor walkways of Hyatt Regency Hotel in Kansas City collapsed in
1981, leading to the death of 114 people and injuring at least another 186
people.158 In the aftermath of this tragedy, the Board sought to discipline the
professionals responsible for this project, including Mr. Duncan.
The AHC found several instances of gross negligence and held that
the licenses of the professionals accused had to be suspended or revoked.
The Board ultimately ordered the revocation of all licenses; this decision
was affirmed by the trial court and the Missouri Court of Appeals. The
Court confirmed that the thrust of the regulations at issue was professional
accountability by a specific individual certified engineer to protect the
public. The rules relating to seal suggest that the responsibility imposed on
engineers for the entire project and all documents connected herewith is
full and non-delegable, unless a disclaimer is explicitly used. This is what
the engineer assumes responsibility for in exchange for the right to practice
the engineering profession.159 It bears mentioning that in this case none of
the engineers involved were convicted of criminal negligence.
The National Society of Professional Engineers (NSPE) has also
adopted a code of ethics for engineers.160 The Board of Ethical Review is
157. Duncan v. Mo. Bd. For Architects, 744 S.W.2d 524 (Mo. Ct. App. 1988).
158. See also Sarah Pfatteicher, “The Hyatt Horror”: Failure and responsibility in
American Engineering, 14:2 ASCE JOURNAL OF PERFORMANCE OF CONSTRUCTED FACILITIES
62 (2000).
159. See also Norbert Delatte, International Ethics and Failures. Case Studies, in
ENGINEERING ETHICS FOR A GLOBALIZED WORLD 39 (Colleen Murphy et al., eds., 2015).
160. NAT’L SOC’Y OF PROF. ENGINEERS, Code of Ethics for Engineers, 2016, Publication # 1102.
2017]
The Future of Transnational Self-Regulation
49
composed of seven licensed engineers. Its mission is, inter alia, to render
opinions as to the interpretation of the Code of Ethics. However, the Code
does not establish a disciplinary mechanism and thus the decisions have an
advisory nature.
In Ireland, the Institution of Engineers of Ireland (Engineers Ireland)
adopted a Code of Ethics that was last revised in 2009. An Ethics and
Disciplinary Board is the standing committee in charge of the enforcement
of the code. In substantiated cases, an Investigative and Disciplinary Panel
deals with a specific complaint. The Ethics Board is composed of sixteen
members where up to four persons are not members of the engineering
profession. Proceedings of the Board, Panel, Council and Appeal Board
are private. Reprimand, suspension, or exclusion from membership are the
most important sanctions that the Panel can impose. Any suspension or
erasure from Engineers Ireland is to be published in the Engineers Journal.
Appeals can be lodged with the three-member Appeal Board, where one
barrister of the Supreme Court also participates.
Self-regulation in engineering can vary depending on the jurisdiction.
In certain cases, a private regime exists in parallel with a public (not
necessarily competing) one, but members of the private regime are only
bound by the former. More interestingly, courts may be asked to establish
a hierarchy among potentially applicable and thus conflicting norms. In
Ontario, a question was raised as to the effects of the new Building Code
Act (BCA) on the otherwise qualified architects and engineers. In
Association of Professional Engineers (Ontario) v Ontario (Minister of
Municipal Affairs and Housing), the Ontario Superior Court of Justice
(Divisional Court) found that professional architects and engineers were
not subject to the BCA and Building Code. Only through legislation could
one envisage parallel regulation of competence and professional integrity.
According to the Court, the BCA’s objective was not to advance public
safety, but rather to intrude on the exclusive mandate of the Association of
Professional Engineers (Ontario) and the Ontario Association of Architects
to qualify, govern, and discipline their members.
When it comes to the professions of architect and engineer, the CJEU
has notably been solicited in cases relating to the recognition of
professional qualifications (or, rather, the absence thereof). This has been
the case for various professions over the years, including lawyers. Thus,
settled case law suggests that domestic competent authorities are required
to take into account the knowledge, diplomas, certificates, qualifications
and experience already recognized or acquired in another EU MS, and give
adequate reasons in case of nonrecognition, as well as allow for access to
Hastings Int’l & Comp. L. Rev.
50
[Vol. 40:1
an effective remedy.161 Of course, contrary to the profession of engineer,
architects in the European Union benefit from an automatic recognition
regime, along with a limited number of other professionals such as
midwives, doctors, or pharmacists.162
Thus, in professions where no automatic recognition can take place,
professionals that are negatively affected by the discretionary powers of the
relevant regulatory body in the host country have to be able to have access
to independent review of the decision of that body. Many times, only
public courts can ensure such review as a last resort.
C. Architecture
In the US, the American Institute of Architects (AIA) agreed on a
Code of Ethics and Professional Conduct already at the beginning of the
20th century. It was most recently amended in 2012. The Code contains
rules of conduct that are mandatory, as well as canons (or ethical standards),
which are nonbinding rules. Failure to comply with the Code’s rules of
conduct constitutes grounds for disciplinary action by the National Ethics
Council (NEC).163 The NEC is composed of seven members appointed by the
AIA Board of Directors and can impose the following sanctions: (a)
admonition; (b) censure; (c) suspension of membership for a period of time;
and (d) termination of membership. In addition to decision, NEC also
delivers advisory opinions. Proceedings are confidential, as is the
discipline of admonition. All other sanctions are public. Decisions to
terminate membership in particular, are to be considered by the Executive
Committee, which, if approved, shall be reviewed by the Board, which is
the supreme body deciding about this sanction. Common ethics violations
include: attribution of credit (that is, stating or giving proper credit for
project involvement); accurate representation of qualifications; attainment
and provision of examples of work; and basic honesty.164
In its 90-12 decision of June 22, 1992, the NEC had to deal with a
claim against an architect who made false statements about the size and
composition of his firm and the experience and professional qualifications
of the employees of the firm, thereby violating certain rules of the AIA
161. See Joined Cases C-422/09; 425/09 and 426/09, Vandorou (2010) E.C.R. I-12411, ¶
65-71; C-345/08, Peśla (2009) E.C.R. I-11677.
162. Council Directive 2005/36/EC O.J. (L 255), at art. 21 (Professional Qualifications).
163. NAT’L ETHICS COUNCIL, Rules of Procedure, THE AM. INST. OF ARCHITECTS 3.
(2016).
164. THE AM. INST. OF ARCHITECTS, The Architect’s Handbook of Professional Practice,
6 (2008).
2017]
The Future of Transnational Self-Regulation
51
Code of Ethics. Architect A’s objective was to receive a rather specialized
commission by submitting information that would give him a comparative
advantage vis-à-vis other firms. Interestingly, architect A claimed that the
preparation of the firm brochure was the responsibility of the other
principal of the firm, who was not an AIA member, and thus was not bound
by the Code. The NEC was not convinced and instead submitted that
architect A should have been aware of the untruthfulness of the information
presented to the interview committee and underscored Members’ responsibility
for “what goes on in their firms.” Because misrepresentations were intentional
and due to the lack of professionalism from the side of architect A, the NEC
imposed the penalty of censure. The decision was appealed to the AIA
Executive Committee, which considered the sanction appropriate. In the
aftermath of the decision, architect A resigned his AIA membership.
More recently, in October 2009, the NEC had to deal with a complaint
brought against an architect who was accused of ignoring the effects that
her proposed design would have on adjoining property owned by the
complainants and of not disclosing information that would enable the
complainants to consent or to act to protect their interests. In addition, the
architect failed to notify the authorities of the unsafe and improper activity
of her clients. In its decision 2006-21,165 the NEC found that the architect
violated the rule prohibiting wanton disregard of the rights of others.
According to NEC case law, wanton disregard entails an action taken in
disregard of a “high degree of risk that the Complainant would be
adversely affected” and that risk “is apparent or would be apparent to a
reasonable person.” The NEC further found that, in effect, the architect
failed to resolve the matter or notify the competent authorities although she
was aware of unsafe and improper activity. Because of this and other
violations of the AIA Code, the NEC imposed the penalty of suspension of
AIA membership for three years.
In Australia, Members of the Royal Australian Institute of Architects
(RAIA) can be subject to the disciplinary mechanism of the association if
they fail to abide by the RAIA’s rules of conduct. The Memorandum of
Association of the RAIA provides that a Professional Conduct Tribunal
shall examine any complaint for misconduct against an Australian
architect. The Tribunal is comprised of fellows of the RAIA of at least 10
years standing, but it can also include a lawyer. The Tribunal can impose
the following sanctions: (private) reprimand, specific professional training
for a period determined by the RAIA Council, suspension of membership
165. Wanton Disregard of the Right of others; et. al Findings, 2006, Decision 21, National Ethics
Council of the American Institute of Architecture, available at: http://www.aia.org/aiaucmp/groups/
aia/documents/document/aiab082037.pdf (last visited Oct. 15, 2016).
52
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
not exceeding two years, and expulsion of membership. Arbitration is also
offered as a substitute to appeal mechanisms. Reinstatement is always
possible, but, in the case of expulsion, at least three years after the decision
by the RAIA Council.
In the United Kingdom, the Professional Conduct Committee (PCC) is
the disciplinary tribunal that hears claims of inappropriate professional
conduct and incompetence against architects. The PCC is chaired by a
solicitor nominated by the Law Society; an architect and one lay member
will typically complete the three-member PCC whose hearings are public.
The PCC can issue reprimands, impose fines, suspend or expel an architect
of the Register. The Architects Act 1997 requires the publication of the
name and offense of those architects who have been found guilty.
In the Matter of Derrick Arthur Matthews, the PCC decided to erase
from its Register an architect who failed to properly manage his finances,
gave misleading information to be readmitted to the Register, and had
inadequate professional indemnity insurance coverage. Sanctions can also
be imposed when the complaint is not directly based on the architect’s
professional competence. For instance, In the Matter of Clive Wille, the
PCC decided that expulsion was the appropriate sanction for an architect
who had several personal problems (e.g., properly dealing with stress;
controlling violent tendencies) that affected his fitness to practice. The
PCC left the possibility for reinstatement open after two years.166
According to the relevant rules of procedure,167 individuals negatively
affected by a decision of the Investigations Panel not willing to refer a
matter to the PCC can request a third-party independent review.
Alternatively, recourse to ordinary judicial proceedings is possible.
Judicial review of decisions of private enforcement mechanisms by
the ordinary courts appears to be fairly deferential and marginal, thereby
accepting at least implicitly the expertise of the disciplinary mechanisms of
the professional associations, but also the importance of legal certainty
when egregious errors are absent. For instance, in Nye v. Ohio Board Of
Examiners of Architects, the Court of Appeals of the Ohio Tenth Appellate
District had to examine an appeal against a judgment by the Franklin
County Court of Common Pleas to affirm an order by the Ohio Board of
Examiners of Architects to revoke the certificate of qualification of an
166. Professionall
Conduct
Community,
ARCHITECTS
REGISTRATION
BD.,
http://www.arb.org.uk/professional_standards/regulating_architects/pcc_decisions/wille.php (last
visited May 2, 2016).
167. See Investigation Rules and Professional Conduct Committee Rules, ARCHITECTS
REGISTRATION BD., http://www.arb.org.uk/files/files/PCC%20rules%202015%20with%20Form
%20A.pdf (last visited Apr. 20, 2016).
2017]
The Future of Transnational Self-Regulation
53
architect to practice architecture.168 In proceedings unrelated to this case,
the architect had admitted to fraud, fraudulent transfers and conduct
preventing the discharge of debt under the bankruptcy code through a
settlement agreement that he concluded with the complainant, the Redeemer
Lutheran Church (RLC). Based on these circumstances, the Board considered
erasure from the Register to be an adequate sanction. In doing so, the Board
found that the sanction of suspension for at least one year that the Hearing
Officer previously recommended was too lenient. The Court of Appeals
used the res judicata doctrine and the terms of the settlement agreement to
ultimately affirm the decision of the County Court.
Nevertheless, ordinary courts will still apply basic principles of law,
especially in cases of manifest legal errors such as ultra vires claims. In
Chandler v. Alberta Association of Architects,169 the Supreme Court of
Canada upheld the decision of the Court of Appeal, which in turn had
agreed with the findings of the Court of Queen’s Bench. The latter had
quashed the disciplinary sanctions imposed by the Practice Review Board
of the Alberta Association of Architects against a firm of architects. In that
case, according to the Architects Act, the Board was only allowed to report
to the Council of the Alberta Association of Architects and make
appropriate recommendations and not assume functions that are entrusted
to the Complaint Review Committee of the Association.
VI. Private Enforcement and Constitutional Matters
When examining the constitutional dimension of private enforcement,
one important area that is worth examining is the interaction between
certain restrictions enclosed in professional codes of ethics, such as
restrictions relating to communications and advertising on one side, and the
protection of human rights on the other.
In particular, professional advertising is considered an essential
component of the freedom of commercial speech. In Bates v. State Bar of
Arizona,170 the United States Supreme Court allowed attorney advertising
for the first time by relying on the First Amendment. More specifically, it
condemned blanket bans on price advertising and fees charged by attorneys
and rules preventing attorneys from using nondeceptive terminology to
describe their fields of practice. According to the Court, “such speech
serves individual and societal interests in assuring informed and reliable
168. Nye v. Ohio Bd. Of Examiners of Architects, 165 Ohio App.3d 502 (2006).
169. Chandler v. Alta. Ass’n of Architects, [1989] 2 S.C.R. 848 (Can.).
170. Bates v. State Bar of Az., 433 US 350 (1977).
54
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
decisionmaking” from consumers.171 In that case, the Supreme Court found
that the postulated connection between advertising and the erosion of true
professionalism to be severely strained.172 It went on to hold that “since the
belief that lawyers are somehow ‘above’ trade has become an anachronism, the
historical foundation for the advertising restraint has crumbled.”173
In Shapero v. Kentucky Bar Association,174 the US Supreme Court
clarified that,
Commercial speech that is not false or deceptive and
does not concern unlawful activities may be restricted
only in the service of a substantial governmental
interest, and only through means that directly advance
that interest.175 Since state regulation of commercial
speech may extend only as far as the interest it serves,
state rules that are designed to prevent the potential for
deception and confusion may be no broader than
reasonably necessary to prevent perceived evil.
Therefore, restrictions relating to commercial speech that is not itself
deceptive is to be narrowly crafted. Having said this, the Supreme Court
confirmed that states have a substantial margin for manoeuvre, as they have
a substantial interest to prevent the dissemination of commercial speech
that is false, deceptive, misleading, or which proposes an illegal
transaction.176 Hence, state rules prohibiting in-person solicitation of clients
by lawyers can be permissible under certain circumstances, as the states
bear “a special responsibility for maintaining standards among members of
the licensed professions and notably lawyers who are essential to the
171. Id. at 365. See also Va. Pharmacy Bd. v. Va. Consumer Council, 425 U.S. 748, 770
(1976).
172. Bates, 433 U.S. at 368.
173. Id. at 372.
174. Shapero v. Kentucky Bar Ass’n., 486 U.S. 466, 472 (1988).
175. This is the so-called Central Hudson test which includes four prongs: (a) is the regulated
speech misleading or involves unlawful activity; (b) the state’s interest in limiting speech is
substantial; (c) the regulation advances this interest in a direct and material way; and (d) the
extent of the restriction on protected speech is narrowly crafted toward the interest served. The
burden of proof lies with the state authorities. See Central Hudson Gas & Electric Corp. v. Public
Service Comm’n of New York, 447 U.S. 557, 566 (1980). For the demanding burden of proof
under this test, see the (concurring in part) opinion of Justice Brennan and Marshall in Zauderer v.
Office of Disciplinary Council of the Supreme Court of Ohio, 471 U.S. 626, 659.
176. Virginia Pharmacy Board v Virginia Citizens Consumer Council, Inc., 425 US 748, at
771-2 (1976); Friedman v. Rogers, 440 U.S. 1 (1979); Pittsburgh Press Co v. Human Relations
Comm’n, 413 U.S. 376 (1973).
2017]
The Future of Transnational Self-Regulation
55
primary governmental function of administrating justice and have
historically been ‘officers of the Courts.’”177 Even if lawyers are selfemployed businessmen who are interested in pursuing their self-interest,
they are also expected to act as trusted agents of their clients and as
assistants to the court in search of a just solution to disputes.178
Thus, in Ohralik v. Ohio State Bar Ass’n,179 the Supreme Court found
that face-to-face solicitation by a lawyer for profit is a practice rife with
possibilities of overreaching, invasion of privacy, the exercise of undue
influence and outright fraud. Whenever state rules and ethical standards of
lawyers are linked to the service and protection of clients notably by
protecting their privacy, they further the goals of true professionalism and
thus are admissible.180 Such measures, including outright bans of in-person
solicitation can be prophylactic ones, aiming to prevent harm before it
occurs, and therefore, proof of actual harm is not required. Such measures
are necessary, because in-person solicitation is not visible or otherwise
subject to effective oversight either by the state or the legal profession.
In Zauderer v. Office of Disciplinary Counsel,181 the Supreme Court
dealt with three more precise questions: prohibitions on soliciting legal
business through advertisements containing advice and information
regarding specific legal problems; restrictions on the use of illustrations in
advertising by lawyers; and disclosure requirements relating to the terms of
contingent fees. Examining the three issues in turn, the Supreme Court
found that lawyers’ newspaper advertisements containing truthful and nondeceptive information and advice regarding the legal rights of potential
clients as well as accurate and nondeceptive illustrations are permissible.
Thus, attorneys are allowed to go beyond passive advertising and use a
more aggressive, but still truthful printed solicitation to attract clients.
However, it found that, even if freedom of commercial speech invalidates
any compulsion to speak, a State should be allowed to seek the maximum
information to prevent deception of consumers. Advertisers’ rights are
protected as long as the disclosure requirements regarding the client’s
liability for costs are reasonably related to the state objective.
Later on, the Supreme Court relaxed its Ohralik jurisprudence.
Thus, it ruled in Shapero that, contrary to in-person solicitation,
targeted, direct-mail solicitation is protected by the First Amendment.
Although the Court accepted that personalized targeted mailing poses
177.
178.
179.
180.
181.
Goldfarb v. Virginia State Bar, 421 U.S. 773, 792 (1975).
Cohen v. Hurley, 366 U.S. 117, 124 (1961).
Ohralik v. Ohio State Bar Ass’n. 436 U.S. 447 (1978).
Id. at 458-9, 462.
Sauderer, 471 U.S. 626 (1985).
Hastings Int’l & Comp. L. Rev.
56
[Vol. 40:1
several risks, it found that a written solicitation is different from inperson solicitation, and therefore a total ban against the former would
be unnecessary, as a less restrictive alternative would be to simply
require that the lawyers file any solicitation letter with a state agency,
“giving the State ample opportunity to supervise mailings and penalize
actual abuses.”182 In more recent cases, the Supreme Court accepted that:
-
specializations of lawyers can under certain circumstances
be advertised;183
a 30-day ban on direct mail solicitation in accident or
disaster cases to protect the privacy of potential recipients
is permissible.184
It remains open whether and how to regulate unverifiable claims made
by lawyers in advertisements seeking to convey the quality of their legal
services. For instance, the New York Code of Professional Responsibility
adopted in 2006 included rules prohibiting the use of nicknames, trade
names, and marketing slogans that may imply an unproved ability to win
cases. In addition, the use of marketing gimmicks and other attentiongetting techniques not containing objective information about legal services
was equally prohibited. In Alexander v. Cahill, the United States Court of
Appeals for the Second Circuit found in 2010 that such regulations do not
materially advance the state’s interest in prohibiting the dissemination of
misleading information.185 The United States Supreme Court denied hearing
the case. Few years earlier, nevertheless, the Florida Supreme Court upheld
restrictions prohibiting a law firm from using an image of a pit bull in its
advertisements.186
In In re R.M.J., the US Supreme Court condemned absolute prohibitions
on certain types of potentially misleading advertisements:187
182. Shapero, 486 U.S. 466, 476 (1988). Previously, in Primus, the United States Supreme
Court had found that communications that can be regarded as a mode of political speech would
be protected more generously than the other cases relating to commercial speech and therefore
state regulation would be scrutinized more broadly. Obviously the absence of pecuniary gain
plays a decisive role here: Ohralik, 436 U.S. 412.
183. Peel v. Attorney Registration and Disciplinary Commission, 496 U.S. 91 (1990); Ibanez
v. Florida Dep’t of Bus. and Prof’l Regulation, 512 U.S. 136 (1994).
184. The Florida Bar v. Went For It, Inc., 515 U.S. 618 (1995).
185. Alexander v Cahill, 589 F.3d, 79 (2d Cir. 2010).
186. Floriba Bar v. Pape, 918 So. 2d 240 (Fla. 2005).
187. Inre RM.J. 455 U.S. 191, 203 (1982).
2017]
The Future of Transnational Self-Regulation
57
Truthful advertising related to lawful activities is
entitled to the protections of the First Amendment. But
when the particular content or method of the advertising
suggests that it is inherently misleading or when
experience has proved that in fact such advertising is subject
to abuse, the States may impose appropriate restrictions.
Misleading advertising may be prohibited entirely. But the
States may not place an absolute prohibition on certain types
of potentially misleading information, e.g., a listing of areas
of practice, if the information also may be presented in a
way that is not deceptive.
The Court also reaffirmed the notion that a state might require a
warning or disclaimer to minimize the likelihood of consumer confusion or
deception.188 However, disclaimers should not be unduly burdensome and
thus rule out the ability of lawyers to employ short advertisements. The US
Court of Appeals for the Fifth Circuit argued as much in Public Citizen Inc.
v. Louisiana Attorney Disciplinary Board.189 In that case, the Fifth Circuit
also outlawed rules prohibiting lawyers from advertising previous litigation
successes and testimonials and banning advertising that depicts a jury or a
judge. Thus, regulation of attorney advertising will continue to be a topical
matter, as states attempt to cope with the emergence of new media and the
limits of content that can be advertised by lawyers.
In De Moor v. Belgium,190 the European Court of Human Rights
(ECTHR) had to examine a complaint by a retired army officer whose
application to be entered in the list of trainee advocates of the Hasselt was
rejected by the Bar Council Mr. De Moor challenged the decision before
the Conseil d’Etat Almost eight years later, the Conseil d’Etat decided
to dismiss the appeal, considering that it lacked jurisdiction to review
decisions of the Bar Council The Court underscored that once Mr. De
Moor fulfilled the conditions for admission, his right of access to the Bar
could not be hampered On the contrary, the disputed decision gave no
reasons as to the objective conditions that the candidate failed to fulfill
The Court found that no public hearing was held to scrutinize the
application and the decision was not delivered in public, thereby violating
Mr. Moor’s right to a fair trial within the meaning of Article 6 of
ECTHR.
188. Id. at 201.
189. Public Citizen Inc v. Couisimm Attorney Disciplinary Board, 632 F3d 212 (5th Cir. 2011).
190. De Moor v. Belgium, 1994 E.C.H.R No. 09-30925.
58
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
VII. Private Enforcement and Competition Law
Enforcing antitrust rules in professional services to harness abuse of
monopoly power and cartel-like behavior by self-regulating professional
bodies has been an important task of the judicial branch. Close surveillance
and control of the activities of largely self-regulating professional bodies is
necessary, as the number of labor forces dependent on licensing procedures
giving access to a given occupation grows.191 A peculiarity of law-related
competition analysis regarding self-regulating bodies endowed with
regulatory power by the state is that no per se (or as such) abuse is created by
the mere fact of assigning exclusive rights or a dominant position in a given
market.192 Indeed, as the US Supreme Court noted in Goldfarb, the public
service aspect of certain professional services and other features of the
professions at stake may call for a more nuanced approach.193 What is
rather key in such an inquiry is whether an abuse of such rights took place
that led to an unreasonable market distortion that cannot be outweighed by
any procompetitive justification.194 For instance, the US Supreme Court
found a prohibition to engage in fraudulent practices or untruthful and
deceptive advertising reasonable.195
Professional rules of private bodies that may have anti-competitive
effects include rules relating to price fixing; recommended prices and
minimum fees; restrictions relating to commercial communications and
advertising; quantitative restrictions to the number of licenses emitted;196
entry requirements and reserved rights; and regulations relating to legal
form, ownership and multidisciplinary practices.197 In several instances,
professional bodies worldwide have included these types of restrictions in
191. See Morris Kleiner & Alan Krueger, Analyzing the Extent and Influence of Occupational
Licensing on the Labor Market, 31 J. LAB. ECON. S173, S198 (2013).
192. Cf. NCAA v. Board of Regents, 468 U.S. 85, 98-104 (1984); Case C-351/12, OSA, 2014,
C.J.E.U., 110, ¶83-84.
193. See, Lewis Goldfarb v. Virginia State Bar, 421 U.S. 773, 788-789 (1975); “may require
that a particular practice, which could properly be viewed as a violation of the Sherman Act in
another context, be treated differently.”
194. The corresponding four-prong test that the CJEU applies is set out in TFEU art. 101:3.
See Case C-238/05, Asnef-Equifax and Administración del Estado, (2006) E.C.R. I-11125, ¶65.
In that case, the CJEU clarified that in assessing the application of Article 101 of the TFEU,
account must be had on the actual context in which a given decision by the professional body is
situated, notably the economic and legal context; the nature of the goods or services affected, and
the real conditions of the functioning and the structure of the market at stake. Id. ¶49.
195. California Dental Association v FTC, 526 U.S. 756 (1999).
196. For instance, a decision of the regulating private body to issue only a small number of new
licenses to practice each year. See Hoover v Ronwin, 466 U.S. 558 (1984).
197. Cf. Communication from the Commission – Report on Competition in Professional
Services, COM (2004) 83 final, at 3 (2004).
2017]
The Future of Transnational Self-Regulation
59
their codes of ethics and linked them to the proper conduct of the
profession or even consumer protection.198
In Goldfarb,199 the United States Supreme Court was called upon to
examine the consistency of a minimum-fee schedule and its enforcement
mechanism with the Sherman Act, as applied to fees for legal services
performed by attorneys in examining titles in connection with financing the
purchase of real estate. Previously, the Court of Appeals expressed the
traditional view at the time that occupational regulation increases quality
and reduces information asymmetries without any negative spillovers.
Thus, it found that the State Bar’s action was immune from liability as state
action. The practice of law does not constitute trade or commerce within
the meaning of the Sherman Act, according to the Court of Appeals.
The Supreme Court, however, found that the Virginia State Bar
practice constituted price-fixing and thus violated § 1 of the Sherman Act.
The schedule was a rigid price floor enforced through the threat of
professional discipline by the State Bar, and by tacitly ensuring that other
lawyers would not compete by underbidding. It created a price system
that consumers were bound to use, as title examination is a necessary step
in financing a real estate purchase. The Supreme Court went on to
examine the alleged immunity of the ‘learned professions’ under the
Sherman Act. The Court took issue with the Court of Appeals and
reminded that the nature of an occupation, standing alone, cannot exclude
the application of the Sherman Act, especially when one considers its
comprehensive language, whereas the public-service aspect of
professional practice is not controlling in determining whether § 1 of the
Sherman Act includes professions.200 The Court observed:201
the examination of a land title is a service; the exchange
of such a service for money is “commerce” in the most
common usage of that word. It is no disparagement of the
practice of law as a profession to acknowledge that it has
this business aspect. . . (Footnote omitted).
198. Commission Decision of 24 June 2004 relating to a proceeding pursuant to Article 81 of
the EC Treaty concerning case COMP/A.38549 – Belgian Architects’ Association (June 24, 2004).
199. Lewis Goldfarb , 421 U.S. 773, 773.
200. Id. Here, the Court referred to a previous case, United States v. Nat’l Assoc. of Real
Estate Boards, 339 US at 485, 489 (1950).
201. Lewis Goldfarb, 421 U.S. 773, 787. However, the Supreme Court clarified that, in
certain circumstances, in view of the public interest aspect and the features of certain professions,
it may be possible that certain restraints, which would otherwise be considered as violating the
Sherman Act, would be treated differenty. Id. at 789.
60
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
The Supreme Court went on to add:202
In the modern world it cannot be denied that the activities
of lawyers play an important part in commercial
intercourse, and that anticompetitive activities by lawyers
may exert a restraint on commerce.
Thus, the United States Supreme Court confirmed that professional
licensing activities affect interstate commerce and cannot escape the
application of antitrust rules under the Sherman Act. A few years later, the
United States Supreme Court had to decide on the compatibility of the
Sherman Act with a rule of ethics adopted by the NSPE prohibiting its
members from submitting competitive bids for engineering services.203
Thus, engineers were guided to refuse to negotiate or even discuss the
question of fees until the client has selected the engineer for a particular
project. The Supreme Court held that the rule at stake amounted to collusion
among competitors who refused to discuss prices with potential clients until
negotiations result in the initial selection of an engineer. This practice operates
as an absolute ban on competitive bidding.
The Court ruled that unfettered competition was essential to the health
of a free market economy and the only lawful way competition could be
restrained was through state or federal legislation. Having said this, ethical
norms in professional services may serve to regulate and promote competition
in such services. In its judgment, the Court dismissed arguments stressing the
possible negative effects of fee competition on the health, safety, and welfare
of the public. The Court also emphasized that enforcement of antitrust rules
does not impinge on the First Amendment.204
Similarly, the United States Justice Department in the same period of
time determined that the Sherman Act of 1890 demanded that architects be
allowed to compete on the basis of fees and that not doing so constituted an
unreasonable trade restriction.
In North Carolina State Board of Dental Examiners v. FTC, the
United States Supreme Court was called upon to decide whether a decision
by the professional selfregulating body to exclude nondentists from the
market for teeth whitening services in North Carolina can be subject to the
Sherman Act. The Court first recalled that certain activities of states in
202. Id. at 788.
203. National Society of Professional Engineers v. United States, 435 U.S. 679, 679 (1978).
204. Id. at 697, citing to Giboney v Empire Storage & Ice Co., 336 US 490, 502 (1949).
2017]
The Future of Transnational Self-Regulation
61
their sovereign capacity which are anticompetitive can escape the purview
of the Sherman Act. For this, the challenged anticompetitive restraint must
be clearly articulated and affirmatively expressed as state policy, and such
policy must be actively supervised by the state.205 According to the Court,
active supervision means that the state has review mechanisms in place that
offer a realistic assurance that the private regulator promotes state policy
when acting in a noncompetitive manner. This would mean that the state
should be able to review the substance of the anticompetitive decision and
if needed, veto or modify that decision to ensure its alignment with state
policy. In addition, to ensure impartiality and objectivity, the State cannot
itself be an active market participant in that same market.
In the case at hand, the Supreme Court found that, absent any active
supervision by the state (which in most professional associations is
missing), the Board cannot invoke state-action antitrust immunity as
established in Parker v. Brown206 if a controlling number of the Board’s
decision-makers are in fact active market participants in the same
profession that the Board regulates.207 Thus, the Supreme Court interpreted
narrowly the concept of the “exercise of the State’s sovereign power” and
confirmed that private regulators lack immunity for anticompetitive
behaviour unless the State accepts political accountability for such behavior
that permits and controls.208 This is so even if such bodies exercise public
functions.209 Implicitly, the Supreme Court also re-opened the discussion
regarding job allocation in the case of overlapping scope of practice for
205. This two-tier test was first established by the Supreme Court in California Retail Liquor
Dealers Assn. v Medcal Aluminium, Inc., 445 U.S. 97, 105. For a discussion, see EDLIN AND
HAW, supra note 37.
206. The state-action exemption was recognized by the US Supreme Court in Parker v
Brown, 317 U.S. 341 (1943).
207. North Carolina State Board of Dental Examiners v. FTC, 135 S.Ct.1101, 1112 (2015).
208. In the aftermath of this decision, the FTC produced a document offering nonbinding
clarifications as to the concept of active supervision. See FTC Staff Guidance on Active
Supervision of State Regulatory Boards Controlled by Market Participants (October 2015). A
similarly narrow hermeneutic approach was adopted by the CJEU in Wouters where the Court
found that competition rules cannot apply to an activity which, by its nature, its aim and the rules
to which it is subject, does not belong to the sphere of economic activity, or which is connected
with the exercise of the powers of a public authority: Case C-309/99, Wouters, J. W. Savelbergh
and Price Waterhouse Belastingadiviseurs BV v. Algemene Raad van de Nederlandse Orde van
Advocaten, (2002) E.C.R. I-1577, ¶57 [hereinafter Wouters]. For an application of this test in the
profession of chartered accountants, see Case C-1/12, Ordem dos Técnicos Oficiais de Contas,
2013, E.C.R (EU).
209. Cf. R. v. Panel on Take-overs and Mergers ex parte Datafin Pic, (1987) Q.B. 815 (U.K.)
(finding that the City’s self-regulating mechanism for mergers and acquisitions is amenable to
judicial review).
62
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
possibly competing professions.210
As noted earlier, anticompetitive behavior may be part and parcel of a
professional code of ethics. Just like the US Supreme Court’s, settled
CJEU case law suggest that rules of professional ethics come within the
scope of EU competition law, as they organize and influence the exercise
of a given profession.211 The compatibility of rules contained in CoC with
EU law may be contentious when examined through the lens of
competition law. Such an examination is, however, necessary to ensure
that equally competitive conditions are offered to the economic operators
active in the EU market, and that rules enshrined in codes of professional
conduct do not impose anti-competitive behaviour.212
On the other side of the Atlantic, the CJEU adopted a sweeping view as to
the applicability of competition rules to professional services. In Wouters, the
CJEU held that lawyers are undertakings within the meaning of Article 101
TFEU.213 The Court justified this finding by noting that they offer services
against remuneration and bear the financial risks that failures may entail.214 By
the same token, the Bar should be regarded as an association of undertakings that
adopts a collusive behaviour in contravention of Article 101 in that it influences
the conduct of its members on the market in the relevant services sector and
directs them to act in a particular manner when they carry their economic
activity.215 These findings apply to every professional association and its
members, as long as they have some regulatory powers.216 Thus, rules created in
the exercise of a professional body’s regulatory autonomy and discretion, such as
the adoption of codes of professional conduct (or of certain rules therein, such as
those relating to advertising or minimum/maximum fees), are decisions adopted
by an association of undertakings within the meaning of Article 101:1 TFEU.217
The CJEU also ruled that a violation of Articles 10 and 81 EC (now 4:3 on
210. Morris Kleiner, Battling over Jobs: Occupational Licensing in Health Care, 106(5) AM.
ECON. R: PAPERS & PROCEEDINGS 165 (2016).
211. Case T-144/99, Institut des mandataires agréés (2001) E.C.R. II-1087, ¶64.
212. Case C-49/07, Motosykletistiki Omospondia Ellados NPID (MOTOE) v. Elliniko
Dimosio (2008) E.C.R. I-4863, ¶51.
213. Art. 101 TFEU prohibits as incompatible with the internal market all decisions by
associations of undertakings which may affect trade between MS and which have as their object
of effect the prevention, restriction or distortion of competition within the EU internal market.
214. Wouters, supra note 208 at ¶49.
215. Id. ¶ 63-4.
216. For the importance of this trait, see the Judgment of the General Court in Case T-90/11,
Ordre national des pharmaciens (ONP), 2014, E.C.R, 1049, ¶347.
217. Wouters, supra note 206, ¶71. See also T-144/99, Institut des mandataires agréés, ¶62.
Interestingly, in this ruling, the General Court found that an outright prohibition of
comparative advertising incorporated in a CoC can violate Article 101 TFEU. Id. at ¶79.
2017]
The Future of Transnational Self-Regulation
63
the Treaty on European Union-TEU218 and 101 TFEU, respectively) occurs
when (a) a MS divests its rules of legislative character through delegation to
private economic actors of the responsibility to take decisions affecting the
economic sphere, or (b) a MS requires or even encourages collusive behaviour
contrary to Article 101 or reinforces its effects.219 Under this latter option, the
behaviour of all self-regulatory bodies can be examined against the EU
competition rules. Furthermore, under certain circumstances, the activity of
professional associations can also constitute an abuse of dominant position.220
In Mauri,221 the issue was whether a violation of EU competition rules
occurs in case when access to the legal profession is determined by a state
examination committee, which consists of five members and two of them – or
potentially three – are already members of the Bar. The CJEU found that this is
outweighed by the presence of two judges who must be regarded as an
emanation of that state. Other outweighing factors also are that the Ministry of
Justice can potentially intervene at every state of the process, whereas negative
decisions can be appealed before the administrative court, which will conduct a
de novo review. Thus, sufficient state involvement coalesced to the
inapplicability of competition rules.
The result in Mauri was in line with the CJEU’s finding in Wouters that
rules adopted by a professional association are, for all practical purposes, state
measures. Therefore, they fall outside the scope of the EU competition rules
when an EU MS grants regulatory powers to that professional association. This
is so even if the state defines the public interest criteria and the essential
principles with which the rules of the professional associaton must comply and
retains its power to adopt decisions in the last resort.222 In addition, the Court
clarified that the fact that a given activity by the professional body does not aim
to make a profit cannot alone prevent the application of Article 101 TFEU where
the offer of services by this body coexists in competition with that of other, forprofit operators.223
In Wouters, the CJEU also found that outright prohibitions of
multidisciplinary practices in the legal profession enclosed in legislative acts or
218. Art. 4.3 TEU incorporates the so-called duty of loyalty for EU MS vis-a-vis the EU and
other EU MS. Treaty of Lisbon, Dec. 13, 2007 [2009, later known as Treaty of the European Union,
consolutated in 2016 C-2-2/16, O.J Thereafter TEUJ.
219. Case C-35/99, Arduino, (2002) E.C.R. I-1529, ¶35; Case 267/86, Van Eycke v. ASPA NV,
(1988) E.C.R. 4769, ¶16.
220. See Panagiotis Delimatsis, “Thou Shall Not… (Dis)Trust”: Codes of Conduct and
Harmonization of Professional Standards in the EU, 47 COMMON MKT L. REV. 1049, 1084 (2010).
221. Case C-250/03, Mauri (2005) E.C.R. I-1267, ¶29-37.
222. Wouters, supra note 208 at ¶54.
223. See Ordem dos Técnicos Oficiais de Contas v. Autoridade da Concorrencia, supra Note
208, at ¶57.
64
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
codes of conduct violate Article 101:1(b). This is because they are liable to limit
production and technical development,224 as they do not allow the exploitation of
the one-stop-shop advantage, the supply of ‘full service’ and the possible
diminution of costs. However, the CJEU submitted that the rules at issue were
designed to ensure the proper conduct of the profession and the sound
administration of justice. Therefore, they were justified and proportionate,
thereby striking a balance between the anti-competitive behaviour and the
pursuit of non-economic legitimate objectives, which may, however, have procompetitive effects.225
Enforcement of competition rules is achieved through the judicial route but
also through the DG Competition of the European Commission. For instance, in
2004, the Commission struck down the recommended fee scale operated by the
Belgian Architects’ Association.226 Although the scale was described as a
guideline with which not all architects had complied, the Commission found that
the fee scale was an independent act of prescriptive character for which the
Association, acting as an association of undertakings according to Article 101
TFEU, was wholly responsible.
Regional competition authorities also attempt to strike down anticompetitive practices of professionals.
For instance, the Finnish
Competition Authority challenged the practice of the Association of
Finnish Architects (SAFA) that prevented its members from entering
architectural competitions only after consulting with or receiving
approval by SAFA. According to the Finnish Competition Authority, this
behaviour constitutes an impermissible output limitation. 227
224. Wouters, supra note 208, at ¶90.
225. See Pietro Manzini, The European Rule of Reason: Crossing the Sea of Doubt, 23 ECL
REV. 392 (2002). Such an interpretation also exemplifies a tendency to apply Art. 101 based on
the methodology of jurisprudence relating to free movement. See R. O’Loughlin, EC
Competition Rules and Free Movement Rules: An Examination of the Parallels and their
Furtherance by the ECJ Wouters Decision, 24 ECL REV. 62 (2003). In Métropole, the General
Court contended that a balancing of anti- and pro-competitive effects can only be accepted under
the narrow confines of Art. 101:3 TFEU. Case T-112/99, Métropole télévision (M6), (2001)
E.C.R. II-2459, ¶74. Arguably, the CJEU was convinced that the rules at issue in Wouters were
welfare-enhancing and thus pro-competitive. See also Communication from the Commission:
Notice of Guidelines on the application of Article 81 (3) of the Treaty, 2004 OJ C 101/98, ¶11,
85, 91-93. It is worth noting that the U.S. Supreme Court found that ethical rules can promote
competition and thus fall within the rule of reason: See National Society of Professional
Engineers v. US, 435 U.S. 679, 696 (1978). See also the Opinion of the AG Léger in Wouters,
supra note 208++ at ¶112.
226. Decision of 26.06.2004, COMP/38.549 - PO / L'Ordre des Architectes belges, available at :
http://ec.europa.eu/competition/antitrust/cases/dec_docs/38549/38549_72_1.pdf(last
accessed
September 15, 2016).
227. FINNISH COMPETITION AUTHORITY, Output limitation in application of architectural
competition conditions. Dnro 669/61/02, (October 11, 2004).
2017]
The Future of Transnational Self-Regulation
65
Pro-competition provisions that lead to better access to professions in
certain markets can also be part of legislative instruments aiming at the
liberalization of the service sector in general. For instance, in the EU, a
long-lasting discussion as to the anti-competitive effects of total bans on
advertising culminated to the adoption of a provision in the EU Services
Directive outlawing total bans on commercial communications. This per se
prohibition has been applied strictly by the CJEU in a recent case regarding
a total prohibition of canvassing in the profession of qualified accountant in
France.228 After defining ‘canvassing’ as an unsolicited personal offer of
goods or services to a certain natural or legal person, the Court found that
the concept of commercial communication set out in Article 24:1 of the
Services Directive is sufficiently broad to cover canvassing that is yet
another form of direct marketing. Therefore, a total prohibition of this
form of commercial communication is inconsistent with the EU Services
Directive and cannot be justified based on a legitimate public interest nor is
it proportionate to the objective it wants to achieve. Crucially, the CJEU
took a pro-liberalization/pro-competition stance adhering to the view that
such prohibitions of advertising deprive EU service suppliers of an effective
means of penetrating a given EU market.229 Arguably, the most interesting
element of this judgment by the CJEU is the fact that the Court dismissed in
two sentences the possibility for justifying such a restriction, alluding to the
narrow test that it is willing to apply in similar cases in the future.
VIII. Conclusion
The objective of this article has been to map rules, instances, and
institutions of enforcement in transnational private regulation regimes.
Such regimes shape the new landscape for global practice of various
professions; they keep the tradition of domestic self-regulation in the
shadow of the law and the State but dramatically expand its territorial
scope through the globalization of guidelines, recommendations and codes
of conduct and ethics. At the same time, self-contained disciplinary
regimes for global professionals are virtually non-existent. Rather, the
creation of disciplinary rules in international professional associations is
left for the future. Nevertheless, the future will soon become the present,
as over half of global exports in services are in the business services sector.
To date, there are noteworthy variations in private, non-judicial
disciplinary proceedings, which are fairly interesting when ordinary
228. See Case C-119/09, Société fiduciaire nationale d’expertise comptable, 2011, E.C.R, 208
229. See, by analogy, Case C-384/93, Alpine Investments, 1995 E.C.R. I-1141, ¶28, 38.
66
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
judicial proceedings are also involved, typically at the appeal stage. In the
latter case, fair trial considerations and clemency when judged by a
professional body are more often than not reasons for striking down or
amending rulings made by the disciplinary bodies of professional
associations. Participation of state representatives and/or non-professionals
can under certain circumstances, ensure independence and impartiality, as
well as satisfy due process.
Having said this, the turn to informality230 at the global level seems to
be irreversible and permeates virtually all types of economic activity. Our
analysis, while explorative, demonstrates that the State (in its various
forms) endows professional associations with self-regulatory authority, but is
still omnipresent in the regulation of professional services.231 In addition,
professional associations may be regarded as decentralized state agencies, as
American courts found for the State Bars. However, principal-agent issues
will most likely arise, as amply demonstrated by the case law discussed above.
Private enforcement is essential when technical expertise is needed to
adequately decide on a complaint against a given professional. On the
other hand, private disciplinary bodies (other than in the legal profession)
may lack legal expertise. In that case, it is quintessential to have envisaged
a disciplinary system that is open to an appeal in ordinary courts or else
ensure that essential due process rights and the rule of law find expression
in the statutes, rules, and by-laws of the professional association at stake.
Self-regulation has been regarded as an excellent way for the State to
remedy information asymmetries and diminish monitoring and enforcement
costs. Enforcement before private bodies that are composed in accordance
with the statutes of a professional association or its code of professional
conduct can indeed be more expedient and somehow alleviate the workload
of courts. In this sense, private non-judicial enforcement and public
judicial mechanisms are functionally mutually reinforcing.232 However,
allegations against the impartiality, objectivity and proper constitution of
their disciplinary mechanisms undermine any sincere efforts by
230. Cf. Joost Pauwelyn et al., When Structures Become Shackles: Stagnation and
Dynamics in International Lawmaking, 25 EUR. J. INT’L L. 733 (2014) (discussing the
increased cooperation and cross-border agreements made outside traditional legal
institutions, such as the UN and WTO).
231. Cf. Kalypso Nicolaidis & Gregory Shaffer, Transnational Mutual Recognition
Regimes: Governance Without Global Government, 68 L. & CONTEMP. PROBS. 263, at 281282 (2005) (arguing that commitment by States still matters even when private bodies in
fact finalize and operate a transnational agreement).
232. See also FABRIZIO CAFAGGI, Enforcing transnational private regulation: models and
patterns, in ENFORCEMENT OF TRANSNATIONAL REGULATION – ENSURING COMPLIANCE IN A
GLOBAL WORLD 75, 81 (Fabrizio Cafaggi, ed., 2012).
2017]
The Future of Transnational Self-Regulation
67
professional bodies to take full advantage of the opportunities that selfregulation provides. Governmental authorities and public courts may be
called upon to scrutinize complaints about anticompetitive practices,
market foreclosure, excessive prices, and monopolies, and to balance
between incommensurables. However, the more powerful transnational
private regimes as meta-regulators become, the more official judicial
mechanisms will see the need for more transnational cooperation and
perhaps collective review of claims.233
Transnational professional associations have to intensify their work on
levelling the playing field with regard to canons of ethics for a given
profession. This includes, inter alia, increasing the level of transparency
internally. Possibilities for drawing inspiration from the legal and judicial
systems around the world abound. As mobility of professionals increases
in a globalized business environment, demands for more streamlined rules
will be emerging more often, leading to more concerted efforts for mutual
recognition or equivalence.
In addition, new technologies should be expected to further transform
the way professional expertise is sought, found, supplied and diffused.234
Technological advances will render necessary a reconceptualization of all
issues relating to professions, from the initiation of mandates to the
conundrum of efficient remedies. This will lead to disruptive innovations that
will transform extant market structures in all backbone professions, including
the three analyzed in this article.235 To avoid the danger of becoming
irrelevant soon, professional associations should intensify their work at the
national and transnational level to factor in these important developments and
use them to positively modernize the supply of professional services.
Researchers will have to critically review such transformations at regular
intervals with a view to ensuring that economic opportunities are distributed
evenly and in a pro-competitive manner. At the more abstract level, future
research will need to more closely assess the extent transnationalism affects the
future and fate of self-regulation in professional services.
233. See also, EYAL BENVENISTI AND GEORGE DOWNS, National courts and transnational
private regulation, in ENFORCEMENT OF TRANSNATIONAL REGULATION – ENSURING COMPLIANCE
IN A GLOBAL WORLD 131, 140 (Fabrizio Cafaggi, ed., 2012).
234. See also, RICHARD SUSSKIND & DANIEL SUSSKIND, THE FUTURE OF THE
PROFESSIONS: HOW TECHNOLOGY WILL TRANSFORM THE WORK OF HUMAN EXPERTS
(Oxford Univ. Press, 2015).
235. See also Ray Worthy Campbell, Rethinking Regulation and Innovation in the US Legal
Services Market, 9 NYU J. OF L. & BUS. 1 (2012).
68
Hastings Int’l & Comp. L. Rev.
***
[Vol. 40:1
Shedding Light on EU Financial Regulators:
A Sociological and Psychological Perspective
BY GIULIANO G. CASTELLANO*and GENEVIÈVE HELLERINGER**
Acknowledgements
Early drafts of this article have been presented at the Socio-Legal Studies
Association (SLSA) Annual Conference, March 31 and April 2, 2015,
University of Warwick, School of Law (United Kingdom); the workshop ‘Crisis
and Innovation in the European Union: Beyond Populism and Managerialism’,
supported by the Academic Association for Contemporary European Studies
(UACES), Society for Legal Scholars (SLS) and the British Academy, May 13,
2016, University of Warwick, School of Law (United Kingdom); and at, the
“The Political Economy of Financial Regulation” Conference June 2 – 4, 2016,
The Chinese University of Hong Kong (Hong Kong). We thank participants to
those events for their invaluable comments. We also thank the editorial team of
the Hastings International and Comparative Law Review for their guidance and
support in the review and publication processes. Usual disclaimers apply.
I.
Introduction
In the aftermath of the 2007-2009 Global Financial Crisis, financial
regulation in the European Union, following an international trend,
underwent a process of intensive legal reforms that led to the revision of the
legal premises underpinning the EU architectural framework for financial
regulation and supervision. The EU has attempted to design a better
equipped supranational apparatus for the governance of financial markets
and crises. This effort accompanies a more general questioning of the role
of law in the financial sector. The interaction between financial entities
and legal rules has been re examined and novel theories have focused on
the idea that legal norms are constitutive elements of finance,1 rather than
exogenous phenomena that intervene upon markets’ spontaneous order as a
deus ex machina. In addition, the behavioral dynamics influencing the
1. Katharina Pistor, A Legal Theory of Finance, 41 J.
OF
COMP. ECON. 315 (2013).
70
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
choices financial consumers, professional investors and other actors of the
financial markets has been scrutinized. The interaction between financial
markets and regulators has been also considered through an enriched,
socio-legal vision.2 These novel approaches helps to understand that the
interaction among regulators, financial entities and consumers occurs
through legal and social constructions. Furthermore, the postulate of
rationality developed in financial economics and influencing the regulators’
understanding of finance has been questioned.3 It is now largely
understood that individual cognitive processing has limited capacity and
that the brain economizes upon such processing by relying on heuristics
and other shortcuts, which will save time but also generate biases and
predictable errors.4 Behavioral finance moved from the fringes of financial
economics to the mainstream stage:5 Regulatory actions are refined in order
to take into account these insights that depart from the traditional
rationality paradigm.6
Despite this attention towards the social and psychological dimensions of
finance, the behavioral dynamics defining regulators’ modus operandi remains an
uncharted area. Echoing the distinction between “rules of the game” and “players”
as key components of markets elaborated in the literature of institutional
economics,7 regulators are at best depicted as players and thus considered as units,
in the form of social actors or organizations. Albeit offering a useful simplification,
such an understanding neglects that organizations are composed of individuals
with objectives that may conflict, even if operating in a cooperative fashion under
an overarching structure.8 Veering from this unitary conception, there is a
flourishing literature in anthropological and sociological studies that considers
2. Julia Black, Reconceiving Financial Markets – From the Economic to the Social, 13 J.
CORP. L. STUD. 401 (2013).
3. In the UK, see Financial Services Authority (FSA), The Turner Review: A Regulatory
Response To The Global Banking Crisis, Ref. No. 003289 (March 2009), available at
http://www.fsa.gov.uk/pubs/other/turner_review.pdf.
4. Kristine Erta et al., Applying Behavioral Economics at the Financial Conduct Authority,
Financial Conduct Authority, Occasional Paper No. 1 (April 2013), available at https://www.
fca.org.uk/publication/occasional-papers/occasional-paper-1.pdf.
5. This is witnessed by the fact that Robert Shiller, considered one of the fathers of
behavioural finance, shared in 2013 the Sveriges Riksbank Prize in Economic Sciences in
Memory of Alfred Nobel with Eugene Fama, commonly referred as the father of the efficientmarkets hypothesis, based on the rationality postulate.
6. Emilio Avgouleas, The Global Financial Crisis, Behavioural Finance Regulation: In
Search of a New Orthodoxy, 9 J. OF CORP. L. STUD. 23 (2009).
7. DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC
PERFORMANCE, 3 - 5 (Cambridge University Press 1990).
8. See generally, Geoffrey M. Hodgson, What are Institutions?, 40 J. OF ECON. ISSUES 1 (2006).
OF
2017]
EU Financial Regulators
71
administrative agencies, such as regulators, as collective entities.9 Through these
lenses, supranational regulatory and supervisory outcomes stem from decisionmaking processes organized by legal provisions that define: membership criteria,
organizational structures with collegial governing bodies, powers, responsibilities,
as well as goals and objectives for each institutions.
For our purpose, and drawing from these studies, financial regulators
are considered as organizations composed of individuals. The conduct of
those individuals are impacted by the legal design as well as by the conduct
of other individuals and organizations, such as investors, depositors, and
various financial firms populating the heterogeneous financial ecosystem.
The external relationship of regulators towards regulated sectors, the public at
large, or the political powers, have received extensive consideration in the
regulatory literature.10 Our paper examines how the legal dimension
influences the relational dynamics within regulators. Drawing on insights
from social psychology, regulators appear to reach decisions through
processes that can be identified and analyzed as collective decision
making,11 shaped by social roles, cultural norms as well as legal design.
Social psychology provides a language that enables to capture and analyze
these aspects,12 as it focuses on the result of individual interactions within
or among groups.13 Social psychology provides an analytical grid that, for
the first time, our paper uses to examine financial regulatory agencies.
Against this backdrop, we focus on the EU institutions directly
involved in the governance of financial markets with the primary objective
of identifying whether basic sociopsychological models could be associated
with the legal framework. For this purpose, we examine the legal rules and
the EU constitutional framework under which regulatory bodies operate. EU
institutions perform their activities and roles within the perimeters of EU law,
as defined by the constitutional provisions enshrined in the Treaty of the
9. See, e.g., MARY DOUGLAS, HOW INSTITUTIONS THINK (Syracuse University Press 1986)
10. See generally, ROBERT BALDWIN, MARTIN CAVE & MARTIN LODGE, UNDERSTANDING
REGULATION: THEORY, STRATEGY AND PRACTICE (Oxford University. Press 2012).
11. See Floyd H. Allport, A Structural Conception of Behavior: Individual and Collective Structural Theory and the Master Problem of Social Psychology, 64 J. OF ABNORMAL PSYCHOL. &
SOC. PSYCHOL. 3 (1962).
12. A classical definition of social psychology was given by Gordon Allport: “Social
psychology is the attempt to understand and explain how the thoughts, feeling, and behaviours of
individuals are influenced by the actual, imagined, or implied presence of other human being”; GW
Allport, The Historical Background of Modern Social Psychology, in HANDBOOK OF SOCIAL
PSYCHOLOGY, vol. 1, at 5 (G. Lindzey ed., Addison-Wesley 1954).
13. Although there is some overlap between sociology and social psychology, there are
also differences. Sociologists tend to relate social behaviours to norms, roles, social class
and other structural variables. Differently, social psychologists focus on the goals, motives and
cognitions of individuals operating in a social context.
72
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
European Union (TEU)14 and the Treaty of the Functioning of the European
Union (TFEU).15 The dynamics amongst the members composing the main
decision-making bodies of these institutions are examined with reference to
public documents, such as judicial decisions, official communications, and
independent reviews of EU institutions. This enables us to focus on the
relational dynamics defining regulators’ actions — with reference to their
primary decision-making bodies — and to relate them to the ‘fundamental
forms of sociality’, as isolated by Alan Fiske in his seminal work.16 Fiske,
bridging different studies and building upon own ethnographic research,
isolates four relational modes in a unified theory of social relations. The
relational modes are archetypes describing the elementary forms of
sociality featuring in every culture and characterizing all social
interactions. These four models, illustrated in detail in the third part of this
paper, are: i) Market Pricing, ii) Equality Matching, iii) Communal
Sharing, and iv) Authority Ranking.17 They operate in all domains of
social action and cognition, such as transfer of property, standards of social
justice, groups decisions, social influence, organization of labor, moral
judgments, response to suffering, and interpretation of human behaviors.
Combinations between the four models result into various forms of social
interactions pursuant to general cultural rules.18 At a more fundamental
level, “the relational models theory explains social life as a process of
seeking, making, sustaining, repairing, adjusting, judging, construing, and
sanctioning relationships.”19
The analysis of EU financial regulators through the prism of the four
fundamental forms of sociality has the potential of opening up new
perspectives. It can offer a better understanding of how these institutions
works and a robust conceptual framework to consider how conflicts within
and among institutions are likely to arise. However, what cannot be
directly inferred from the behavioral dynamics of specific decision-making
bodies, is the overall psychological attitude (or culture) of the regulatory
14. Treaty of Lisbon, Dec. 13, 2007 [2009], later known as Treaty of the European Union,
consolidated in 2016 C 202/16, O.J [hereinafter TEU].
15. Treaty of Lisbon, Dec. 13, 2007 [2009], Treaty on the Functioning of the European Union,
consolidated in 2016 C 202/16, O.J [hereinafter TFEU].
16. Alan Page Fiske, The Four Elementary Forms of Sociality: Framework for a Unified Theory
of Social Relations, 99 PSYCHOL. REV. 689, 689 (1992) [hereinafter Fiske, Four Forms of Sociality].
17. Identified by Fiske through field study in West Africa and also uncovered at the same
period in other branches of social sciences. See ALAN PAGE FISKE, STRUCTURES OF SOCIAL LIFE:
THE FOUR ELEMENTARY FORMS OF HUMAN RELATIONS (Free Press, 1991). [hereinafter Fiske,
Structures of Social Life].
18. Fiske, Four Forms of Sociality, supra note 16, at 690.
19. Id. at 689.
2017]
EU Financial Regulators
73
agencies under scrutiny. In fact, by steering away from the idea that
regulators are unitary entities, various forms of sociality naturally
characterize only specific bodies within agencies and institutions. Yet,
given that these bodies are ultimately responsible for determining critical
regulatory outcomes, mapping their inherent behavioral dynamics appears
to offer a novel set of analytical tools through which regulatory activities
could be examined. To this end, we elicit the underlying core relational
blueprint, or dominant relational model characterizing the decision-making
process of EU institutions in discharging their regulatory functions towards the
financial sector. Particular attention will be given to the European
Commission, the European Central Bank, and the European Supervisory
Authorities. From a theoretical standpoint, a given relational structure calls for
specific decision making processes, group dynamic, and governing values.
However, tensions and prolonged dissents among individuals operating in a
collective structure may extend the natural divergence of opinions and affect
relational dynamics sustaining the cooperative efforts. The article then applies
the analytical framework offered by social psychology to the current issues that
financial, economic, and political crises have exacerbated.
The overhaul of the EU architectural framework for financial
regulation and supervision, leading to the establishment of a Banking
Union and triggering the agenda for a broader Financial Union, generated
constitutional conundrums in the EU primary law. It created overlaps and
tensions amongst EU institutions that are designed to protect the stability of
the single currency and EU institutions that are in charge of the integrity of
the single market as a whole. As a result, an increasingly sharper divide
emerges between Member States taking part to the euro-area (Eurozone)
and Member States whose currency is not the euro (non-Eurozone) and that
are not participating in the Banking Union. This divide furthers with the
threats to the unity of the European project posed by the UK decision to
leave the EU following the results of the referendum (held on June 23,
2016) and generally termed as Brexit. This fragmentation calls into
question the reliance on common values underpinning and guiding the
collective decision-making process of EU financial regulators, when the
representatives of Eurozone and non-Eurozone countries have to cooperate.
Hence, the sociopsychological perspective appears also useful to advance
prospective analyses over a variety of critical aspects affecting the unfolding
European architectural framework for financial regulation and supervision.
As a prerequisite to the sociopsychological examination of EU
financial regulators, the article offers a typology to navigate through the
complex, multilayered EU architectural framework for financial markets
supervisions and regulation. The typology is constructed by reference to
two dimensions: the function of institutions vis-à-vis the common interest
74
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
of the Union, on the one hand; the constitutional status of such institutions,
on the other hand. First, the EU is a sui generis regional structure,
constructed as an international legal community. Its institutions are
inspired by a “common interest,” and are also designed to pursue such
interest, which, in turn, is an autonomous and fluid concept that does not
necessarily overlap with the interests of its individual members. Specific
institutional capacities are required to define the legal and policy contents of
the common interest and to carry on its effective development. Hence, it
emerges that EU regulators perform three key functions vis-à-vis the general
interest of the Union, i.e., advancing and protecting its existence, defining its
content, and ensuring its operation throughout the Union. Second, regulators
may be classified into two main categories, by reference to their constitutional
statuses. Only some financial regulatory institutions are established through EU
primary law: the European Commission (the Commission) and the European
Central Bank (ECB). Other financial institutions in the EU, such as the European
Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB)
have been created through secondary laws, whilst supervisory coordination
amongst national authorities over cross-border financial entities and operations
occurs through Colleges of Supervisors and, within the Banking Union, Joint
Supervisory Teams. These are network-based mechanisms, governed primarily
through memoranda of understandings and secondary law provisions.
This typology is not merely descriptive. Beyond the classification of the
institutions, it offers a useful tool to identify how EU institutions operate.
Typically, the two dimensions, i.e., the function of the institutions vis-à-vis the
common interest, first, and the constitutional status of the institutions, second,
bear a direct relationship with specific relational models. This means that
where a given decision-making organ within an institution performs more
than one function, more than one model of sociality is expected to operate.
Also, we find that institutions whose legitimacy and remit is enshrined in the
Treaty framework appear to follow the Communal Sharing and the Equality
Matching forms of sociality, where considerations over common interest and
balance within the group establish the ground for a structured cooperation.
By contrast, notwithstanding the specific reference to the pursuit of the
common interest in the remits of the ESAs, they appear to organize their
social relationship around Market Pricing models, where the maximization
of individual interests, i.e., the interests of Member States advanced by the
individuals composing the decision-making bodies of the ESA, dominates
the group dynamics.
The argument of this article develops in five parts. Part II introduces
the EU multilevel architectural framework for financial regulation and
supervision, stressing the waves of reforms that led to the current
governance apparatus. Subsequently, the concept of common interest is
2017]
EU Financial Regulators
75
introduced and the typology for financial regulators is constructed by
focusing on the Commission, the ECB and the ESAs, with reference to
other form of institutional cooperation among financial regulators. Part III
illustrates the theory of relational models. It then applies it to isolate the
dominant relational modes for each of the above-mentioned institutions
within the EU legal order. Part IV offers an application of the sociopsychological framework in the context of the current tension between
Eurozone and non-Eurozone countries. Conclusive remarks will follow in
Part V.
II. The Architectural Framework for Financial Regulation in
the European Union
The EU multilevel governance developed to provide new mechanisms
to address an increasingly complex and diverse range of policy issues
requiring enhanced supranational coordination.20 In its current form, it
strongly departs from the initial design, whereby the supranational
decision-making process was confined to specific domains that were dealt
within the fora offered by Treaty-based institutions, largely following the
unanimity principle amongst founding members.21 The EU governance
framework has evolved into a broader apparatus with its own system of rules
and procedures, where the recourse to delegated legislations follow the logics
of the “regulatory state.”22 These developments lie at the core of the transition
from the Common Market to the Internal Market overarching aim, as
introduced with the Single European Act and reinforced, in particular, by the
Treaty of Maastricht and the Lisbon Treaty.23 However, the translation of
the general EU principles into administrative and regulatory actions
advancing the integration of national financial markets proved to be one of
the most difficult ambits for the European project.24
20. On the emergence of multi-level governance in different sectors, see e.g., David Coen &
Mark Thatcher, Network Governance and Multi-Level Delegation: European Networks of
Regulatory Agencies, 28 J. OF PUB. POL’Y 49 (2008).
21. See, e.g., Jacques Pelkmans, The New Approach to Technical Harmonization and
Standardization, 25 J. OF COMMON MKT. STUD. 249 (1987).
22. See, e.g., Giandomendico Majone, The Rise of the Regulatory State in Europe, 17 w.
eur. pol. 77 (1994); see also, Thomas Christiansen, Goverance in the European Union, in
MICHELLE CINI & NIEVES PEREZ-SOLORZANO BORRAGAN, EUROPEAN UNION POLITICS (5th ed.
2016) (for an evolution of the EU governance approaches).
23. The Single European Act, 1987 (L169) O.J. 29, paved the way to economic and
monetary union set forth in the Treaty of Maastricht.
24. See generally, Lucia Quaglia, “Old” and “New” Politics of Financial Services
Regulation in the European Union, 17 NEW POL. ECONOMY 515 (2012); see also, Emiliano
Hastings Int’l & Comp. L. Rev.
76
[Vol. 40:1
The resulting architectural framework for financial regulation and
supervision in the EU designs a complex institutional arrangement that
involves supranational institutions and national authorities linked through
mechanisms of cooperation and coordination. General policy objectives,
such as the integration of financial services or the maintenance of financial
stability, justify regulatory and supervisory convergences that are
increasingly more centralized at the supranational level. The authorities
involved in these tasks respond to different logics that are set forth in the
constitutional premises of EU primary laws and influenced by the interests
of Member States, which may not necessarily collimate with those of the
Union at large. After presenting the developments leading to the current
multilevel governance framework for financial regulatory governance, the
various institutions involved are considered in light of the function they
perform towards the advancement, the identification, and the realization of the
EU general interest. It will emerge that the different levels of institutional
engagement with the broad — and often vague — overarching goal of
pursuing a common interest characterize the relational dynamics within
institutions, which may ultimately affect their decision-making process.
A.
The EU Multi-level
Regulation
Governance
of
Financial
The modern architectural framework for financial regulation and
supervision in the EU is rooted in the Treaty framework and builds upon a
series of profound reforms spanning decades. For exposition clarity, three
consecutive phases of reform could be isolated, starting from the turn of the
century. Each phase sets the legal and institutional premises upon which new
legal and regulatory changes have been implemented. The first phase,
covering the first years of the new millennium, was marked by the
Commission’s Financial Services Action Plan (FSAP), comprising 42
measures — to be adopted over six years (1999-2004) — intended to
harmonize the legal rules affecting various aspects of banking, insurance
and securities sectors as well as other forms financial services.25 The
enterprise followed the primary policy objective of establishing an
integrated financial market, given that its development was lagging behind
Grossman, Network European Financial Integration: Finally the Great Leap Forward?, 49 J. OF
COMMON MKT. STUD. 413 (2011); For an earlier comment, see EU Securities Market
Regulation: Adapting to the Needs of a Single Capital Market, Centre for European Policy
Studies Task Force, Report No. 34 (Mar. 1, 2001).
25. See Implementing the Framework for Financial Markets: Action Plan, COM (1999)
232, European Commission (May 11, 1999).
2017]
EU Financial Regulators
77
the general process of economic integration. A high level of legal
harmonization, mutual recognition and the passport rule were the core
principles to ensure a single market for financial services. The backbone of
this ambitious plan was offered in the Lamfalussy Report,26 which also
established the ground for a novel rule-making process, commonly referred
to as the Lamfalussy Process.27 The Lamfalussy Process, gave a new
legislative impetus and affirmed the prominence of the EU institutional
apparatus in the rule-making process, with a consequential curtailment of
the regulatory powers of Member States. With the completion of the FSAP
a process of review started, characterized by a relative tranquility and, more
generally, by the archival of the Constitutional Treaty and the adoption of
the Lisbon Treaty.
The second and the third phase have been initiated during the Seventh
European Parliament (2009-2014) and continue to present days, with the
Eighth European Parliament (2014-2019). In particular, the second phase is
marked by the reforms adopted as a response to the Global Financial Crisis
that affected European countries as a diffused credit crisis, a sovereign debt
crisis, and the consequential eurocrisis. While markets and regulators were
enjoying a period of regulatory pause after the adoption of the FSAP, the
unfolding crises required profound revisions with a shift in the primary
objectives. The establishment of a single market mutated into the
necessity of preserving its integrity by designing new rules and a new
institutional framework to prevent and cope with financial crises at the
supranational level. The de Larosière Report on the Global Financial
Crisis offered the blueprint for such reforms. 28 One of the first
measures consisted in the establishment of a European System of
Financial Supervision (ESFS), 29 which transformed the Lamfalussy
committees into three ESAs and established the ESRB, entrusted with
the responsibility of overseeing the integrity of the European financial
system.30 The ESAs are composed of representatives of Member States’
regulatory authorities and are: the European Banking Authority
26. A. Lamfalussy, D. Wright & P Delsaux, Final Report of the Committee of Wise Men
on the Regulation of European Securities Markets, 85, 89, 93, & 95 (Feb. 15, 2001).
27. For a comprehensive review of the rule-making process enacted through the Lamfalussy
Process see Niamh Maloney, The Lamfalussy Legislative Model: A New Era for the EC Securities
and Investment Services Regime, 52 INT’L AND COMP. L. Q. 509 (2003) (for a comprehensive review
of the rule-making process enacted through the Lamfalussy Process).
28. The High-Level Group on Financial Supervision in the EU: Report, The de Larosiere
Group (Feb. 25, 2009).
29. Council Directive 2010/78, 2010 O.J. (L 331) 120, 120 (EU).
30. Council Regulation 1092/2010, 2010 O.J. (L 331) 1, 2 (EU); Council Regulation 1096/2010,
2010 O.J. (L 331) 162 (EU).
78
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
(EBA),31 the European Insurance and Occupational Pensions Authority
(EIOPA),32 and the European Securities and Markets Authority
(ESMA).33 The roles among various EU institutions and Member States
resulted segmented following a three-layered allocation of
responsibilities. These are:
i.)
A supranational level, where the Commission acts as primary
financial regulator, with rule-drafting and policy-setting
prerogatives established by EU primary laws to define a
harmonized set of rules.
ii.)
A national level, where supervisory tasks have been primarily
allocated. Member States’ administrative authorities have
been called to ensure the application of the EU law under the
principle of mutual recognition and the passport rule and
supervisory responsibilities have been distributed between
‘home’ and ‘host’ jurisdictions for cross-border financial
entities and operations. A further mechanism of coordination
has been offered by an increased reliance on Colleges of
Supervisors, which are network-based structures of national
authorities established to supervise multinational entities.
iii)
The intermediate level was introduced with the establishment of
the ESAs. The ESAs offer both technical assistance to the
Commission in the drafting of regulatory standards and
coordination in conducting supervisory tasks. Hence they are
intended to enhance both ‘horizontal’ cooperation, i.e., among
national authorities, and ‘vertical’ cooperation, i.e. between
national authorities and the Commission.34
The third phase of institutional reforms is landmarked by an
enhancement of supranational centralization, with the establishment of a
Banking Union, which, since 2014, has acquired more definitive legal
31. Council Regulation 1093/2010, 2010 O.J. (L 331) 12 (EU) [hereinafter EBA Regulation].
32. Council Regulation 1094/2010, 2010 O.J. (L 331) 48, 49 (EU).
33. Council Regulation 1095/2010, 2010 O.J. (L 331) 84, 85 (EU) [hereinafter ESMA
Regulation].
34. Giuliano G. Castellano et al., Reforming European Union Financial Regulation: Thinking
through Governance Models, 23 EUR. BUS. L. REV. 409 (2012).
2017]
EU Financial Regulators
79
contours.35 The Banking Union is composed of a Single Rulebook, a
Single Supervisory Mechanism (SSM),36 a Single Resolution Mechanism
(SRM),37 and a Common Deposit Guarantee Scheme.38 From an
institutional perspective, the SSM and the SRM substantially modifies the
geometry of the architectural framework in the EU. In fact, in the SSM, the
ECB has been tasked with the power to directly and indirectly supervise
credit institutions operating in Member States that adopts the euro as a
common currency as well as those of EU countries that decide to join.
Whereas rule-making prerogatives largely belong to the Commission in
conjunction with the ESAs — in particular, to the EBA — the supervision of
approximately 6,000 banking institutions has been allocated to the ECB within
the SSM. Albeit the enforcement relies on national authorities, the ECB
enjoys direct sanctioning powers. New coordination mechanisms have been
established and the daily supervisory activity is carried out through Joint
Supervisory Teams, composed of staff from both the ECB and the competent
authorities of Member States where regulated credit institutions operate.
The SRM took effect on January 1, 2016, and represents the legal and
institutional framework for the orderly resolution and recovery of banks
within the Banking Union. The SRM is aligned with the needs of ensuring
the integrity of the single market and complements the SSM by establishing
Single Resolution Board (SRB),39 which represents the resolution authority
for the financial entities directly supervised by the ECB (plus all crossborder groups) and oversees national competent authorities. The SRB
administers the Single Resolution Fund.40 The Fund is made up of the
contributions of market participants — primarily, but not exclusively, banks
— of the nineteen Member States participating to the Banking Union. It
supports bank resolutions and is the first line of defense in case of a major
financial crisis that requires public funds to rescue troubled financial
institutions while ensuring the viability of their businesses. The SSM and the
SRM are essential elements of the Banking Union and represent a new
configuration of powers and responsibilities between the central
35. See Niamh Moloney, European Banking Union: Assessing Its Risks and Resilience, 51
COMMON L. MKT. REV. 1609 (2014) (for a comprehensive assessment of the EU Banking Union);
But see, David Howarth & Lucia Quaglia, Banking Union as Holy Grail: Rebuilding the Single
Market in Financial Services, Stabilizing Europe's Banks and ‘Completing’ Economic and Monetary
Union, 51 NEW POL. ECON. 103 (2013) (on the different positions of EU Member States).
36. Council Regulation 1024/2013, 2013 O.J. (L 287) 63, 63 — 64 (EU).
37. Council Regulation 2015/81, 2015 O.J. (L 15/1) 1 (EU).
38. Council Common Position 2014 No. 49/2014, O.J. (L 173) 149 (EC).
39. Council Regulation 806/2014, 2014 O.J. (L 225) 1 (EU).
40. Council Agreement 8457/14, Intergovernmental Agreement on the Single
Resolution Fund, May 14, 2014.
Hastings Int’l & Comp. L. Rev.
80
[Vol. 40:1
(supranational) level and national supervisory structures.
The new institutional arrangement does not replace the
aforementioned tripartite distribution of competencies and responsibilities
that applies across the entire Union. However, as far as the Banking Union
is concerned, the segmentation between supranational rule-making and
national supervision is substantially reduced. As further illustrated below,
the resulting institutional arrangement stretches the boundaries of EU
primary law and, in consideration of the different constitutional status of
the ECB, the Commission, and the EBA, institutional conflicts may result.
The trend towards a progressive centralization based on the collaboration
with national authorities is likely to characterize the proximate future of EU
financial regulation. While in the aftermath of the Global Financial Crisis
the attention has been primary towards the banking sector and financial
stability constituted the primary policy objective for financial regulation,41
the idea of deepening the integration across all financial sectors emerges
distinctively from the Capital Markets Union project, as President Junker
declared in his opening statement to the European Parliament.42
B.
The Common Interest in EU Financial Regulatory
Framework
From the above, it is possible to identify in the key institutional
players specific functions vis-à-vis the constitutional framework
established by the Treaties. Such a functional account differs from the
more traditional distinction between institutions tasked with rule-making or
supervisory powers.43 In particular, it is possible to isolate three main
functions that EU institutions involved in the governance of financial
markets should perform under the EU primary laws. These are: (i) the
safeguard and the advancement of a pan-European common interest; (ii)
the definition of its contents, with regards to financial regulation; and (iii)
the operative application of the measures enacted to protect or advance
such a common interest.
Recognizing and protecting a common interest lies at the roots of the
41. Niamh Moloney, The Legacy Effects of the Financial Crisis on Regulatory Design in the
EU, in Eilís Ferran et al., (eds.), THE REGULATORY AFTERMATH OF THE GLOBAL FINANCIAL CRISIS
152 (Cambridge University Press 2012).
42. Jean-Claude Juncker, Opening Statement in the European Parliament Plenary Session in
Strasbourg, at 18, July 15, 2014, transcript available at http://www.eesc.europa.eu/resources/docs
/jean-claude-juncker---political-guidelines.pdf.
43. See, e.g., NIMAH MOLONEY, EU SECURITIES AND FINANCIAL MARKETS REGULATION
(Oxford EU Law Library, 3d. ed., Oxford University Press 2014).
2017]
EU Financial Regulators
81
European project. Yet its precise definition escapes specific legal
parameters and appears to be a concept that generally reflects the ethos of
the European project; a plurality of national interests is collapsed into the
interest of one community where resources are shared through the
establishment of a single market. The Treaty of Paris of 1951 and Treaty
of Rome of 1957 intended precisely to design an international legal
framework to share resources among European countries in order to ensure
the political and economic stability of the region. As Robert Schuman
stated in the Declaration of May 9, 1950, “[t]he solidarity in production
thus established will make it plain that any war between France and
Germany becomes not merely unthinkable, but materially impossible.”44
The creation of a common market was, in fact, based on the pooled
production of coal and steel. This established the roots for a common
interest and, in turn, required a supranational governance structure to
safeguard and advance such an interest, namely the High Authority from
which the modern Commission derives. Upon this idealized construction,
the common interest may be originally conceived as the interest in, first,
creating and, then, protecting a single market.45
The evolution of the European project, leading to a Union, builds upon
this embryonic supranational apparatus, which progressively enlarged,
reflecting the expansion of the perimeters of the common interest.46
Further developments and elaborations provided by European institutions
and, in particular, by the European Court of Justice, reveal that the common
interest is not a static concept. Rather it constitutes the essential bond for
constructing the European project and for identifying Europe as a
community. Hence, the common interest seems to coincide with the
preservation of the community in itself and, as such, it is superior to and
autonomous from the interests of individual Member States.
Since the landmark decision in Van Gend en Loos,47 EU law
transcends national laws and diverges from traditional international legal
44. Robert Schuman, A United States of Europe, speech recorded in SELECTION OF TEXTS
CONCERNING INSTITUTIONAL MATTERS OF THE COMMUNITY FROM 1950 TO 1982, 47, European
Parliament Committee on Institutional Affairs (1982).
45. Case 26/62, Van Gend en Loos v. Nederlandse Administratie der Belastingen, 1963 E.C.R.,
2-15 (this point emerges from the decision in this case, and is further illustrated below) [hereinafter Van
Gend en Loos].
46. See, DAMIAN CHALMERS ET AL., EUROPEAN UNION LAW, Ch. 1 (Cambridge University Press,
3d ed., 2014) (Chapter One provides a complete account of the evolution of the European Communities
and the subsequent establishment of the European Union).
47. Van Gend en Loos, supra note 45, at 4. In 2013, the Court of Justice marked the 50th
anniversary of the judgment highlighting the constitutional importance of the judgment, see
Conference Proceedings, May 15, 2013, available at http://curia.europa.eu/jcms/jcms/P_95693/en/.
82
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
arrangements by creating a legal community whose members are: states,
national administrations, as well as citizens, industries and corporations. The
judgment defined Europe as a legal community based on a new legal order that
is independent from national legal systems. Its members have direct
relationships with the legal community through a series of rights and
obligations that are justified by the pursuit of common interest. The
common interest is defined by the Court as the establishment of a common
market,48 which translated into the commitment to establish a functioning
internal market, pursuant to Article 26 of the TFEU.
A modern reading of Van Gend en Loos indicates that the Court
established the premises for a strong leadership of EU institutions towards
Member States. EU institutions have the monopoly over both the pursuit of
community’s interest and the teleological reasoning that determines
whether a specific action is legitimized under the pursuit of such a common
interest.49
The authority thereby established appears to define a
hierarchical organization well summarized in the doctrine of supremacy of
European law over national law.50 These considerations have merit in
offering a deeper understanding of the dynamics shaping the European
constitutional architecture. Nonetheless, they have to be juxtaposed to the idea
that Member States accept their subordination to a supranational community
not under a federalist legal doctrine. Rather they accepted a voluntarily act of
subordination, in specific areas, towards a community in which they are active
and integral components. This organization serves to both expand and
advance the common interest of the community through its translation into
objectives that could be pragmatically pursued by the EU governance
apparatus. For instance, the measures to increase the integration of
financial services in the last decades have been identified by the
Lamfalussy and the de Larosiere reports, which were then put forward by
the Commission.51
In the context of financial markets governance, financial stability is
not a direct interest of the EU legal community. Instead, it is a derived
objective that emanates from the overarching interest of, first, integrating
financial services through the free circulation of capital and services as
currently enshrined in TFEU Article 26(2), and, then, by preserving the
48. Id.
49. Damian Chalmers & Luis Barroso, What Van Gend en Loos Stands For?, 12 INT’L J. OF
CONST. L. 102, 113—114 (2014).
50. Case 6/64, Flaminio Costa v. National Electricity Board (ENEL), 1964 E.C.R. 587–601.
51. More generally, the steps necessary for the establishment of an internal market have been
advanced by Lord Cockfield in the White Paper on Completion of Internal Market. See Completing
the Internal Market, 85 COM 310 (1985).
2017]
EU Financial Regulators
83
integrity of integrated financial markets. Following the 2007-2009
financial crisis, the necessity for international and supranational efforts to
ensure financial stability and curb systemic risk became evident, given that
the decisions purely driven by national interests could compromise the
stability of the single market.52 In pursuing this enlarged dimension of the
common interest, the EU legal order has expanded to include financial stability
as a central element; particularly for Member States adopting the common
currency, which automatically join the Banking Union. From the above it
emerges that the common interest is a fluid concept that changes depending on
the needs of community.
i. Institutions Warranting the Existence of The Common
Interest.
Within this constitutional framework the Commission — first, as the
Commission of the European Communities, then, as the European
Commission — represents, in its own words, the ‘embodiment’ of the common
interest.53 The Commission is thus conceived and designed as an institution
that is divorced from the interests of individual Member States. It has been
noted that the notion of fonction publique européenne (European civil
service) cites the administrative functions of the Commission above
national politics and defines the authority under which its officers perform
their duties and tasks.54 This role and identity derives directly from EU
primary law and it has been reaffirmed with the Lisbon Treaty. The
Commission is expected to be a guardian, by overseeing the correct and
harmonious application of European law across the EU55 and by acting as
both the police and the prosecutor of the Union.56 It also acts as a
gatekeeper by channeling the interests of different groups into legislative
proposals that are (or should be) in line with the common interest of the
52. For instance, in the context of the resolution of large, cross-border financial institutions
Rosa M. Lastra, Systemic Risk, SIFIs and Financial Stability 6 CAP. MARKETS L. J. 197 (2011);
Dirk Schoenmaker, Banking Supervision and Resolution: The European Dimension 6 L. & FIN.
MARKETS REV. 52 (2012).
53. European Commission, The European Commission: 1995-2000, 7 (DGX, Office for
Official Publications of the European Communities 1995).
54. CRIS SHORE, BUILDING EUROPE: THE CULTURAL POLITICS OF EUROPEAN INTEGRATION, 178
(Routledge 2013).
55. Treaty of Lisbon art. 17, Dec. 18, 2007 [2009].
56. See R. Schütze, European Constitutional Law 194 (2d ed., Cambridge University Press
2016). The Commission’s role of main protector of the Union notably emerges from its ability of
commencing infringement procedures against Member States (TFEU, supra note 15, at art. 258,)
and other EU Institutions (TFEU, supra note 15, at art. 263).
84
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Union.57 Moreover, the Commission enjoys quasi-legislative and policysetting powers that define the contents of the common interest; albeit, it has
direct legislative powers only on specific fields related to the protection of
the common interest,58 as further illustrated below.
The multifaceted and evolving nature of the common interest is also
reflected in the evolution of European primary law. In particular, by virtue
of the Maastricht Treaty,59 the Community’s interest expanded with the
inclusion of “economic and monetary union” — immediately after the
reference to the “common market” — amongst the objectives of the
Community enumerated in EC Treaty, Article 2.60 Such an addition
resulted in two major consequences. First, it expanded the role of the
Commission in new areas and, second, offered the constitutional ground,
also in the core objectives of the Community for establishing the European
System of Central Banks, chaired by a supranational central bank. The
need for a European central bank became apparent precisely with the
decision to move towards a monetary union. The ECB hence came into
existence in 1998 and assumed its formal functions starting January 1,
1999, when the euro was introduced as common currency. The process
appears a natural development when the emergence of national central
banks is considered. In the 17th Century, starting with the Swedish
Riksbank and the Bank of England,61 national central banks emerged in
Europe to regulate money supply. Their role and structure evolved from
purely private institutions to entities performing a public function. Once
embedded in the legal, or even constitutional framework, central banks
traditionally discharged their tasks through higher degrees of institutional
autonomy and independence from political powers.62
Within the European context, the establishment of the ECB as an
autonomous body protecting the interest of the monetary union was
ambiguous. First, the Maastricht Treaty included the provisions on
57. DAMIAN CHALMERS ET AL., EUROPEAN UNION LAW, 72 (Cambridge University Press, 3d ed., 2014).
58. Specifically, the Commission may take directives or decisions to Member States to ensure
that public undertakings are compliant with the provisions of the TFEU, supra note 15, at art. 106(3),
and it may regulate the conditions under which EU nationals may remain in the territory of a Member
State, after having being employed there, pursuant to the TFEU, supra note 15, at art. 45(3)(d).
59. The Treaty of Maastricht, Feb. 7, 1992, established the European Union and substantially
amended the Treaty establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S.
11, as amended by Single European Act.
60. Treaty of Rome as reported in Consolidated Version of the Treaty Establishing the European
Community, Oct. 11, 1997, C 340 P. 0173 O.J. [Hereafter EC Treaty].
61. Founded, respectively, in 1664 and in 1694.
62. Rosa M. Lastra, The Evolution of the European Central Banki, 35 FORDHAM INT’L L.J. 1260
(2012).
2017]
EU Financial Regulators
85
monetary and economic union within the EC Treaty, rather than in separate
protocols or pillars, like the Common Foreign and Security Policy and the
Cooperation in Justice and Home Affairs.63 This signaled an expansion of
the scope of the common interest to cover deeper levels of integration.
Second, a new constitutional balance resulted, whereby the Commission
and other institutions, such as the European Court of Justice, extended their
roles to cover new domains, e.g., by ensuring judicial reviews over ECB’s
decisions.64 Third, notwithstanding the fact that monetary and economic
union are key constitutional objectives, the ECB had an unclear constitutional
status, given that it was not included the pantheon of the Community’s
institutions. Its existence was provided by EC Treaty, Article 8, which was
separated from the provisions concerning other institutions.
Such an ambiguity became evident in, and to some extent resolved by,
the OLAF case.65 The ECB, in rejecting to be subjected to the
Commission’s review, claimed to enjoy a legal personality and autonomy
that should have been considered distinct from those attributed to the other
Community institutions. The Court, largely following the Advocate
General’s opinion, rejected this view, stating that the ECB, in discharging
its task of maintaining price stability, supports the general economic policy
of the European Community, thus should be subjected to its rule of law
even while enjoying a great degree of autonomy. 66 As a result, even if the
ECB performs its monetary policy to preserve the interest of the monetary
union, and the euro, the principal guardian of the general Community’s
interest, that includes the proper functioning of all its institutions, remains
the Commission.
The Lisbon Treaty reshaped the EU constitutional framework and
deepened the notion of “union” to mark an intensified European
integration. The pervasiveness of European supranational structure and the
idea of “community” was strengthened by building on established legal
principles of European Law to further partition the interests of individual
members from those of the community at large. After the years spent in
vain on the Constitutional Treaty, the Lisbon Treaty has marked a new
ambitious step more reassuringly rooted in the acquis communautaire.
63. For an historical account, see DESMOND DINAN, EUROPE RECAST: A HISTORY OF EUROPEAN
UNION, 240 (Palgrave Macmillan Basingstoke 2004).
64. EC Treaty, supra note 60, at art. 230.
65. C-11/00 Commission v. European Central Bank, 1999/726, 1991 E.C.R. (EC).
66. A position sustained by various commentators, see, e.g., J-V Louis, The Economic
and Monetary Union: Law and Institutions, 41 COMMON MKT. L. REV. 575 (2004); Rojer J.
Goebel, Court of Justice Oversight over the European Central Bank: Delimiting the Ecb's
Constitutional Autonomy and Independence in the Olaf Judgment, 29 FORDHAM INT’L L.J.
610 (2005).
86
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Instead of announcing a global revision, the Lisbon Treaty relied on
amendments to the acquis created by the Rome Treaty establishing the
European Community and to the Maastricht Treaty establishing the
European Union. The duality between the European Union and the
European Community collapsed into a renewed European Union. Within
this novel constitutional framework, whose implications affect the entire
European political, economic, and legal spectrum,67 two elements are of
particular relevance for our analysis. First, the central role of the
Commission in protecting the interest of the Union has been reaffirmed, by
ensuring its monopoly of legislative initiative and by explicitly conferring
executive powers to the Commission. Prior to the Lisbon Treaty the
Council exclusively held executive powers. Second, the Lisbon Treaty
clarified the role of the ECB, which gained new constitutional status.
TEU Article 13(1) expressly identifies the ECB as one of the core
institutions of the European Union. ECB’s primary objective — laid down
in TFEU Article 127(1) — is the pursuit of monetary stability. This
objective must be pursued without prejudice to the support of general EU
economic policies and contribute to the achievement of the general EU
interests and objective enshrined in Article 3 TEU. In addition, the same
article attributed to the ECB the general objective of contributing to the
overall stability of the financial system and allowed the Council to delegate
the supervision of the banking sector to the ECB.68 It is precisely upon these
constitutional premises that the Banking Union was established. This new
architectural framework illustrates how the ECB participates in the coming
into existence of a new governance function of the Union: the stability of the
financial systems in the Eurozone,69 and the supervision of banking
institutions via the Banking Union.
The Commission and the ECB also enjoy a significant level of
independence and autonomy. TEU Article 17(3) and TFEU Article 245
establish the independence of the Commission and the Commissioners who
should not favor any specific country or body and should pursue the general
interest of the Union. Likewise, Article 130 TFEU ensures the independence
of the ECB and of its governing organs while performing monetary policy
functions. Through TFEU Article 282(3), which refers to independence as
an attribute of the powers granted to the ECB, independence is also
67. For a comprehensive review and analysis of the changes implemented with Treaty
of Lisbon, see PAUL CRAIG, THE LISBON TREATY: LAW, POLITICS, AND TREATY REFORM
(Oxford University Press 2010).
68. TFEU, supra note 15, at art. 127(6).
69. ROBERT SCHÜTZE, EUROPEAN CONSTITUTIONAL LAW, 154 (Cambridge University Press
2012).
2017]
EU Financial Regulators
87
extended to the newly acquired supervisory functions granted to the ECB
within the SSM.70
ii. Institutions Defining the Content of the Common Interest
The definition of the contents of the common interest is reflected in
the powers of EU institutions to adapt it, through policy-setting, rulemaking, interpretative efforts, to the mutating needs of various policy
domains. In other words, the common interest is not a static concept.
Rather it is articulated in a series of specific legislative and regulatory
activity that ensure the survival and, possibly, the thriving of the
community. The European Court of Justice is probably the most
representative EU institution carrying out a constant interpretative activity
to define the contents of the common interest. In the context of financial
regulation, the Commission appears as a key player in expanding the
contours of the common interest and in defining its contents.
Pursuant to TEU Article 17, “the Commission shall promote the general
interest of the Union and take appropriate initiatives to that end” (emphasis
added). In discharging its legislative, quasi-legislative and executive roles,
the Commission, other than being a guardian of the Union and its law, acts as an
"engine” of both the European Union and integration process, through its
prerogative of formally proposing legislative bills.71 The responsibility of
initiating the policy-making process extends to setting the annual
legislative program of the Union as well as stimulating the debate over
reforms, usually via Green or White Papers. The leading role of the
Commission in defining the content of the Union’s common interest has
gained intensity through the use of quasi-legislative powers supported by
the “comitology” system. The comitology system consists of specialized
committees, composed of national administrators that assist the exercise of
delegated legislative powers granted to the Commission.72 The wide use of
70. It was debated whether the independence of the ECB would extend also to the newly
acquired supervisory powers; however, the issue has been resolved in favour of an extensive
interpretation of TFEU, supra note 15, at art. 282(3) – given that the norm does not pose any
specific restriction; see Benedikt Wolfers, Thomas Voland, Level the playing field: The New
Supervision of Credit Institutions by the European Central Bank 51 COMMON MARKET L. REV.,
1463, 1487, (2014).
71. Treaty of Lisbon, supra, note 55, at art. 17(2). However, the majority of the Commission’s
bills advance regulations; whereas directives are most commonly originated from the Parliament or
the Council. NEIL NUGENT & MARK RHINARD, THE EUROPEAN COMMISSION, 284 (Palgrave
Macmillan, 2d, 2015).
72. See J. Blom-Hansen, The Origins of the EU Comitology System: A Case of Informal
Agenda-Setting by the Commission, 15 J. OF EUR. PUB. POL’Y 208 (2008); Fabio Franchino,
88
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
comitology and delegated legislative powers has raised concerns over the
democratic accountability of a quasi-legislative process pivoting around an
unelected institution.73
In the context of financial regulation, the Lamfalussy Process relied
massively upon the comitology system with the objective, felt particularly
strong before the Global Financial Crisis, of rapidly integrating national
financial industries and markets. Hence, if, on the one hand, the
Lamfalussy Process redesigned the procedures of rule-making with a
greater involvement of specialized committees, the Commission’s FSAP,
on the other hand, provided the legal contents deemed necessary to
establish an integrated market for financial services. To this end, a high
level of detail has characterized the measures contained in the FSAP. The
traditional distinction between regulations and directives blurred with the
progressive abandonment of the minimum harmonization approach –
according to which EU law only establishes minimum standards leaving to
Member States the possibility to add new rules in the transposition process
— in favor of a more pronounced reliance on maximum harmonization,
according to which Member States are expressly prevented from adopting
additional rules.74 Within this framework, the centrality of the Commission
emerges distinctively in defining the contents of financial regulation, and
thereby articulating the elements of the common interest.
After the completion of the FSAP and with the entrance into force of
the Lisbon Treaty in 2009 — which coincidentally also marked the postfinancial crisis phase of EU financial regulation — a new definition of the
common interest emerged. As earlier noted, the necessity of enacting
measures to support the creation of a single market mutated into the
necessity of ensuring its integrity by preserving financial stability.
This led to the establishment of the Banking Union, of which the
Commission was the primary promoter.
The establishment of a Banking Union, within the European
Union — aimed at defining a more centralized apparatus in response to
current and, possibly, future financial crises —became a part of the
Commission’s agenda towards deeper economic and monetary
integration. Central to the Banking Union is the Single Rulebook,
which is a set of substantive rules that builds upon and expands the
Delegating Powers in the European Community, 34 BRITISH J. OF POL. SCI. 269 (2004).
73. See id.; see inter alia, Michelle Cini, The European Commission: An Unelected
Legislator?, 8 THE J. OF LEGIS. STUD. 14 (2002).
74. For a comment on the benefits and the drawbacks of these approaches in the context of
securities regulation, see Carsten Gerner-Beuerle, United in Diversity: Maximum Versus Minimum
Harmonization in EU Securities Regulation 7 CAP. MKT. L. J. 317 (2012).
2017]
EU Financial Regulators
89
measures implemented through the FSAP. New capital requirements, 75
harmonized provisions for deposit guarantee schemes, 76 and common
rules for recovery and resolution of troubled banking institutions 77
represent the major novelties in the bulk of EU substantive laws that are
applicable to all credit institutions operating in all Member States. 78 It
has been noted that, rather than a cohesive set of legislative provisions,
the Single Rulebook encompasses a number of measures including
legislative, nonlegislative and implementing acts.79 This is potentially in
conflict with the higher level of centralization sought through the new
institutional structure and prompted distinguished commentators to question
the appropriateness of the term “single rulebook”80 and to highlight the need
for enhanced enforcement mechanisms and approaches.81
iii.
Institutions Ensuring The Operation of The Common
Interest
The safeguard and the definition of the contents common interest
percolate from EU primary laws to secondary legislative acts and
ultimately to the administrative mechanisms that allows the enactment and the
enforcement of EU law across the legal systems of its Members States. It is
precisely the institutional framework enacting regulatory and administrative
provisions that locates a general, programmatic objective and puts it into
operation. In the general context of EU financial regulation, this function
appears to be primarily performed by non-Treaty institutions, namely the
ESAs, with a resulting dilution of the pursuit of a common interest with the
interests of individual Member States. Such a structure is anchored to the
constitutional fabric of EU law that in turn is stretched to create a peculiar
75. Council Directive 2013/36, 2013 O.J. (L 176) (EU), referred to as Capital Requirement
Directives IV (CRD IV); Council Regulation No. 575/2013, 2013 O.J. (L176) (EU), referred to as
Capital Requirement Regulation (CRR).
76. Council Directive 2014/49, 2014 O.J. (L 173) (EU).
77. Council Directive 2014/59, 2014 O.J. (L 173) (EU).
78. To the list of major novelties in financial regulation, the following should be added: the
Markets in Financial Instruments Directive II (Council Directive 2014/65, 2014, O.J. (L 173) 349(EU));
the Markets in Financial Instruments Regulation (Council Regulation 600/2014 2014, O.J. (L 173) 84
(EU)), the 2014 Market Abuse Regulation (Council Regulation 596/2014, 2014 O.J. (L 173) 1(EU))
and Council Directive 2014/57 O.J. 2014 (L 173) 179 (EU)).
79. Moloney, European Banking Union, supra note 35 at 1611.
80. Eilís Ferran, European Banking Union: Imperfect, but It Can Work, in, EUROPEAN BANKING
UNION, (Danny Busch & Guido Ferrarini eds., Oxford University Press 2015).
81. Dalvinder Singh, The Centralisation of European Financial Regulation and Supervision: Is
There a Need for a Single Enforcement Handbook?, 16 EUR. BUS. ORG. L. REV. 439 (2015).
90
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
architectural framework for financial regulation and supervision.
The ESAs (and the ESRB) acquire their legal personality from TFEU
Article 114 . Article 114 stipulates that the European Parliament and Council
may take required measures for the approximation of the provisions contained
in law, regulation, or administrative action of Member States “which have as
their object the establishment and functioning of the internal market.”
Through the interpretation of Article 114 TFEU offered by the European
Court of Justice and defining the Meroni doctrine on the establishment of
new European authorities,82 the three ESAs and the ESRB are soft-law
bodies;83 or, to use the EU law terminology, they are measures for the
approximation of national laws. The ESAs define Regulatory Technical
Standards and Implementing Technical Standards. They also oversee the
correct implementation and application of EU laws and may intervene in case
of emergency. Their legitimacy in conducting rule-making activity is ascribed
to the provisions of the Treaty governing the exercise of the quasi-legislative
powers attributed to the Commission, specifically TFEU Articles 290 and 291.
Hence, when secondary legislative acts entrust the Commission with the power
to enact a delegated act pursuant to TFEU Article 290, the ESAs draft these
acts in the form of Regulatory Technical Standards. These standards are
then endorsed by the Commission and subjected to the possibility of veto
by the Council and the Parliament, as established by the same article. Also,
in the case of implementing acts, pursuant to TFEU Article 291, the ESAs
draft these acts in the form of Implementing Technical Standards, subject
to the procedures and control contained in that norm. In both instances, the
Commission has limited room to amend those acts or reject them, thus
restricting its role to an activity of oversight on the legality of technical
standards and their conformity with the general interest of the Union.
Furthermore, albeit the Treaty does not contain an explicit possibility for
delegating directly to the ESAs, it is not uncommon for the provisions of
the Single Rulebook, composed of regulations enacted by the Council or by
Parliament, to confer on the ESAs delegated powers.84 In this respect, the
EBA represents the guardian of regulatory convergence and the keeper of
the Single Rulebook of which defines its contents and, in principle, gives it
a sense of cohesiveness.85
82. Case 9/56, Meroni & Co., Industrie Metallurgiche s.p.a v. High Authority, 1957-1958,
E.C.R. 133; Case 10/56 Meroni & Co., Industrie Metallurgiche s.p.a v. High Authority, 19571958, E.C.R. 157.
83. Eilís Ferran & Kern Alexander, Can Soft Law Bodies Be Effective? The Special Case of the
European Systemic Risk Board 6 EUR. L. REV. 751 (2010).
84. For instance, capital requirements often delegate the EBA to establish specific provisions.
85. Access to the Single Rulebook is granted via the EBA website.
2017]
EU Financial Regulators
91
The amplitude and the pervasiveness of the powers allocated to the
ESAs emerge from a recent case, where the UK sought before the Court of
Justice the annulment of the provision,86 contained in Article 28 of
Regulation 236/2012 regulating short-selling operations.87 That regulation
granted the ESMA the power of adopting legally binding measures in the event
of a threat to the stability or the orderly functioning of the EU financial system.
According to the applicant, TFEU Article 114 was not the appropriate legal
basis for this delegation of powers and was at odds with the constitutional
imbalances of the EU. Moreover, the UK sustained that the Parliament and the
Council do not have any authority under the EU primary law to delegate
powers to a EU body, whose amplitude was deemed to violate the limits set
by the Meroni doctrine. The Court rejected the request of annulment and
noted that the powers conferred to the ESMA are sufficiently restricted and
are thus in conformity with the principles established in Meroni. The Court
further noted that the powers follow a regulatory logic that requires temporary
restrictions, confined to emergency circumstances threatening the integrity of
the single market. Furthermore, consultation with other relevant EU
institutions is required and ESMA’s acts may be challenged through judicial
review, given that the Lisbon Treaty explicitly permits judicial review of
acts of EU agencies and other bodies. This judicial review implies the
possibility a conferral of powers outside the perimeters of delegated
legislation established by Articles 290 and 291.88 The Court also stated
that those binding measures are devices to ensure further coordination and
approximation of national laws, given that the addressees are markets’
participants, only in circumscribed circumstances, when ESMA represents
a regulator of “last resort.”89
The expanded role of nontreaty based institutions exemplifies the rise
of the administrative Union,90 whereby governmental tasks are transferred
to bodies not expressly mentioned in the constitutional design. In the postLisbon settlement, the comitology system has been substituted by a system
of “agencies,” where national representatives are asked to enact the
86. Case C-270/12, United Kingdom of Great Britain and Northern Ireland v. European
Parliament and Council of the European Union, 2014 Grand Chamber (EU) [hearinafter UK v.
European Parliament and Council].
87. Council Regulation No. 236/2012, 2012, O.J. (L86/1) (EU).
88. Under Article 263 of the TFEU, acts of “bodies, offices” and “agencies” of the Union may be
subject to judicial review by the Court. The rules governing actions for failure are also applicable
pursuant to Article 265. Furthermore, courts and tribunals of the Member States may refer questions
over the validity and the interpretation of those acts in accordance to Article 267. Finally, such acts are
subject to Article 277 governing the pleas of illegality.
89. UK v. European Parliament and Council, supra note 86, at para 108.
90. Cf. Gary Lawson, The Rise and Rise of the Administrative State, 107 HARV. L. REV. 1231 (1994).
92
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
common interest of the Union. The decision-making process, thus, follows
a logic — and, as further elaborated below, a relational dynamic — that is
different from the one adopted by supranational, Treaty-based institutions
governed by EU civil servants to advance, or even embody, the common
interest. Albeit it has been argued that the ESAs are structurally
intergovernmental91 and that the national interests are naturally embedded
in the decision-making process of the ESAs. In fact, their governing
organs follow the (simple or qualified) majority voting rule, as does, for
instance, the Council, the EU political institution par excellence.92
The establishment of a Banking Union also had an impact on the role
performed by treaty-based and non treaty-based institutions (and national
authorities) to operate the common interest. As noted earlier, banking
supervision occurs through a single supervisory mechanism, i.e., the SSM,
which is composed of the ECB and national authorities. TFEU Article
127(6) de facto and de jure mandates the advancement of the common
interest to a Treaty-based institution, i.e., the ECB. However, the ECB is
subjected to the rules drafted by the EBA and to a large extent enforcement
is conducted by national authorities and coordination ensured through Joint
Supervisory Teams. In fact, the SSM operates on the basis of a mix of EU
and national legislations;93 thus if a sufficient level of harmonization is not
reached the application of EU laws may be impaired.94 Harmonization is, in
principle, ensured by the Single Rulebook and by the implementing and
delegated standards of the EBA. Nonetheless, national authorities, in
exercising their supervisory tasks, may adopt different approaches and
enforcement strategies, potentially undermining the uniformity sought through
the implementation of common rules.95 All in all, within the Banking Union
the multilevel governance may be summarized as follows:
i.) Two Treaty-based authorities are involved in the regulatory
governance of the EU banking sector. The Commission in
91. Niamh Moloney, The European Securities and Markets Authority and Institutional Design for
the EU Financial Market A- Tale of Two Competences: Part (1) Rule-Making, 12 EUR. BUS. ORG. L.
REV. 41, 77 (2011).
92. PAUL CRAIG, COMITOLOGY, RULEMAKING AND THE LISBON SETTLEMENT: TENSIONS AND
STRAINS, RULEMAKING BY THE COMMISSION: THE NEW SYSTEM, (Carl Bergstrom & Dominique
Ritleng, Oxford University Press (2015).
93. See, e.g., European Central Bank Regulation, Art. 4(3), 9(1), 18(5), and 21(4).
94. A problem noted by many. See, e.g., Andrea Enria, European Central Authority Chairman,
The New Role of the European Banking Authority in the Banking Union, ESE Conference in
Frankfurt, (2013).
95. See Valia Babis, Single Rulebook for Prudential Regulation of Banks: Mission
Accomplished? 26 EUR. BUS. L. REV. 779 (2015); Singh, supra note 81.
2017]
EU Financial Regulators
93
exercising policy-setting and quasi-legislative powers (within
the limits just illustrated) ensures both the advancement of the
common interests and the definition of its contents. The ECB
oversees monetary stability and discharges its newly acquired
supervisory functions towards banking institutions operating
in the Banking Union. In so doing, the ECB also safeguards
the common interest while defining its contents.
ii.)
Soft-law bodies, i.e. the ESAs and the ESRB, put into
operation the common interest, by defining technical
standards, and ensuring regulatory and supervisory
convergence both within and outside the Banking Union. In
particular, the EBA and the ESMA, albeit composed of
national representatives, should exercise their powers in line
with the interest of the EU.
iii.) Network-based systems, i.e. Joint Supervisory Teams, ensure
the daily supervision and coordination among national
authorities that, by definition, pursue national interests, but, in
applying common rules, should also operate for the
realization of the common interest.
The resulting framework appears to be complex with different decisionmaking centers. Their structures, procedures, and organizations might
generate new policy conflicts or deeper fragmentation. In particular, the role
of the ESAs and their constitutional configuration pose three critical issues.
First, in this schema, the ECB discharges its newly acquired — yet
enshrined in the Treaty — supervisory duties in line with its general
function of protecting the interest of the monetary union. In operating this
interest, the ECB will apply technical standards (regulatory or
implementing) that have been drafted by an institution not established by
the Treaty, i.e., the EBA, and whose new institutional capacity may
potentially adumbrate the role of treaty-based institutions. Second, the risk
of the EBA to be politicized, as noted also by the International Monetary
Fund, may ultimately undermine the effective operability of the Banking
Union.96 Third and related, the membership of the EBA extends to all EU
countries, bringing together Member States participating in the Banking
96. European Union: Publication of Financial Sector Assessment Program Documentation—
Technical Note on European Banking Authority, 7 — 87, International Monetary Fund Country
Report, No. 13/74 (2013).
94
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Union and Member States outside that arrangement.
The overlaps of different national and supranational interests,
canvassed in an institutional framework that does not sufficiently
counteract the risk of politicization and with dubious constitutional
contours, may affect the relationship among Member States, in particular
between those that are subjected to the Banking Union and those that do
not participate in it and have not adopted the single currency. The first
group of countries may see the EBA as a forum where undue pressures may
be exercised towards the ECB, undermining its constitutional prerogatives.
The second group, instead, may see in the new supervisory role of the ECB
as a curtailment of their powers to influence the regulatory governance of
the EU through their participation in the EBA. For instance, the EU SubCommittee on Economic and Financial Affairs of the House of Lords,
chaired by Lord Harrison, remarked in a report on the Banking Union that
the SSM, by allocating new powers to the ECB may undermine the
authority of the EBA.97 The EBA Chairman Enria has also highlighted that
a chasm in the single market might emerge, given that Member States
within and outside the SSM jurisdiction are driven by different priorities.98
In this respect, it appears that the primary role of the EBA in the years to
come will be to ensure a link between countries that are participating in the
Banking Union and those that are not, by offering an interpretation of the Single
Rulebook and ensuring coordinated supervision.99 Further convergence in the
regulatory framework and in supervisory practices affecting all EU members
appears to be the primary way forward to minimize the risk of a two-speed
financial market within the EU.
These issues are approached as phenomena related to the relational
dynamics among the individuals participating in the decision-making
process of the relevant EU institutions involved in the regulation and
supervision of financial markets. These relational dynamics are here
examined through the lenses of social psychology that allows identifying the
primary forms of sociality underpinning the governance process. To this
aim, it is necessary to determine how the EU constitutional framework
shapes the relational dynamics within the institutions here considered. This
analysis will assist in elucidating the depth of the concerns animating the
current debate over the institutional design for financial markets governance
in the EU.
97. EUROPEAN BANKING UNION: KEY ISSUES AND CHALLENGES, 2012, H.L. Paper 88, at 28.
98. Andrea Enria, Chairman of EBA, Challenges for the Future of EU Banking, Speech made at
Madrid 3d Financial Meeting, Jan. 2015.
99. Eilís Ferran, The Existential Search of the European Banking Authority, EUR. BUS. ORG. L.
REV. 1 (2016).
2017]
EU Financial Regulators
95
III. Forms of Sociality in EU Financial Regulation
Studies in the field of social psychology and anthropology highlight
that relational structures call for specific decision making processes, group
dynamic, and governing values. These structures are defined by four
fundamental relational models, or forms of sociality, which characterize
every group and may coexist within the same group of individuals.100 In
Fiske’s words, all “domains and aspects of social relations may be
organized by combinations of just four elementary models (schemata, rules,
or grammars): communal sharing, authority ranking, equality matching,
and market pricing”101 Identifying the sociopsychological models at play
within a given institution enables us to better understand how this institution
works. To this purpose, the typology presented in the previous section elicits
the core legal components that, by setting the premises for a collective action,
contribute to the definition of a specific socio-psychological (or relational)
model and, therefore, to a predictable operating mode also.
Of particular relevance in any collective structure is the prominence
given to a shared objective that could be more or less detached to the
interests of its individual members. In the context of financial regulation,
and EU institutions in general, this is well represented by the identification
of a common (European) interest. EU Institutions that perform different
functions, for instance, by advancing and defining the contents of the common
interests, are expected to display more than one relational model, which adds
to the complexity of the multilayer governance model. Before advancing an
analysis of the sociopsychological models characterizing EU financial
regulators, it is worth introducing the four elementary forms of sociality.
A.
Elementary Forms of Sociality
The theory of social relations identifies four relational models that
characterize any social interaction in every culture.102 Combinations
between these four models build various social forms in accordance to the
contingent cultural framework. Hence, through these lenses the social
dimension of interactions among individuals is understood as a process that
involves “seeking, making, sustaining, repairing, adjusting, judging,
construing, and sanctioning relationships.”103 The four models — i.e. Market
100.
101.
102.
103.
Fiske, Four Forms of Sociality, supra note 16.
Id. at 690.
Id. at 689.
Id. at 690.
96
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Pricing (MP), Equality, Matching (EM), Communal Sharing (CS), and
Authority Ranking (AR) — operate in all domains of social action and
cognition, such as transfer of property, definition of standards of conduct,
group decisions, or organization of labor. The core characteristics for each
of these relational modes are briefly presented here, drawing primarily from
Fiske’s unified understanding of the theory of social relations.
Market Pricing represents the most pervasive mode of sociality in
Western cultures.104 Within this form of sociality, relationships among
individuals are based on more or less rational calculations of cost-andbenefit ratios and proceed by self-interested exchange. An illustration of
the decision mechanism that is at play in MP is provided by Adam Smith’s
invisible hand of the market. Market prices or exchange rates are means to
facilitate trade, whereby individuals aim at maximizing their idiosyncratic
values through a transaction. The voluntary nature of an arrangement is
considered as a source of legitimacy and the rationality postulate is often
assumed. While rationality is not a necessary element, MP may, in fact,
characterize a relational arrangement even if choices are not considered
rational. Other than price and exchange mechanisms, MP represents a
driving force that can guide coordinated action towards a general goal, as
long as the goal is pursued through voluntary actions that imply a
calculative attitude. For example, in a hiring process, the establishment of
specific criteria, such as the level of formal education, relies on the value
that — depending on the social and cultural context considered — is
attributed to such criteria. Hence, defined parameters and agreed criteria
are necessary, as are prices, to relational dynamics responding to the MP
logic. Groups operating (primarily) under this mode, require explicit rules,
usually formally stated, to guide their decisions and allow a cost-benefit
analysis. In this model, justifications for the actions taken often rely on a
utilitarian and individualistic logic that is deemed to put forward the
advancement of the general interest. This is, for instance, the rationale
underlying the General Equilibrium Theory, according to which the
interactions amongst multiple, profit-seeking individuals lead to a point of
market equilibrium and, thus, to the maximization of the general welfare.105
Albeit MP is the most common relational mode, it is not the only mode of
relating to others in Western cultures.106 The three other modes are also
present, though in more subtle ways, precisely because the rules governing
104. Fiske, Four Forms of Sociality, supra note 16 at 706.
105. Kenneth J. Arrow & Gerard Debreu, Existence of an Equilibrium for a Competitive
Economy, 22 ECONOMETRICA. 265, (1954).
106. See generally, KARL POLANYI, THE GREAT TRANSFORMATION: THE POLITICAL AND
ECONOMIC ORIGINS OF OUR TIMES (Beacon Press 2001).
2017]
EU Financial Regulators
97
social interactions remain (often) implicit.
In the Equality Matching mode of relation,107 exchange is also central.
Exchange is so central that some authors conflate EM and MP under the
general label of “exchange relationships.”108 However, in comparison to
MP, EM presents a distinctive focus on ensuring an even balance: Each
member of the group is entitled to the same amount pursuant to egalitarian
and distributive justice principles. In this schema, any imbalance can be
accounted for through the principles of equality and reciprocity. Empirical
studies highlighted a distinct tendency of punishing individuals whose
actions, not obliging to general principles of reciprocity and equality, were
deemed unfair. In particular, when the participants to an experiment were
asked to share a fixed sum with anonymous strangers, identified only by the
distribution they had proposed in a previous round, the large majority opted
to share the amount evenly only with those unknown individuals who had
previously shared their sum evenly.109 Rawls’ theory of justice provides,
with its notorious reference to the “veil of ignorance,” an illustration of the
ethical dynamics underlying EM.110 In fact, the veil of ignorance is a
thought experiment according to which rulers would not know the role that
they will play in a world where they are called to determine the rules.
Under relational models governed through equality a balanced distribution of
resources is incentivized, making no share worse than the others.111 EM
involves distinct individuals who are considered and respected as equals and
whose differences are acknowledged and assessed to reach an optimal point,
which is represented by an even balance.
In Communal Sharing relationships,112 members of a group consider
each other as of the same kind, as belonging to a single group, or as sharing
a common identity. Communal relationships are characterized by mutual
feelings of responsibility for the well-being of other members and of the
107. Fiske, Four Forms of Sociality, supra note 16, at 702.
108. Margaret S. Clark & Judson Mills, Interpersonal Attraction in Exchange and Communal
Relationships, 37 J. PERSONALITY & SOC. PSYCHOL. 12, (1979) [hereinafter Interpersonal
Attraction]; Judson Mills & Margaret S. Clark, Exchange and Communal Relationships, in 3 REV.
OF PERSONALITY & SOC. PSYCHOL. (L. Wheeler ed., Sage 1982) [hereinafter Exchange and
Communal Relationships].
109. Daniel Kahneman, Jack L. Knetsch & Richard H. Thaler, Fairness and Assumptions of
Economics, 59 J. BUS. 285 (1986).
110. See, generally, JOHN RAWLS, A THEORY OF JUSTICE (Harvard University Press 2009).
111. A similar criterion is encountered in economics with the concept of pareto-efficiency,
whereby a given allocation of resources among individuals is considered optimal when it is impossible
to make any individual better off, without making someone worse off; see Vilfredo Pareto, The New
Theories of Economics, 5 J. POL. & ECON. 485 (1897).
112. Fiske, Four Forms of Sociality, supra note 16, at 693.
98
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
group as a whole; benefits and concessions are given in response to the
needs of the others without expectation of repayment. By contrast, in
“exchange relationships,” intended as both MP and EM, benefits are given
in response to specific benefits received in the past or with the expectation
to receive benefits in the future.113 While CS is typical of family, romantic
or friendly relationships, the exchange relationships are found more often
among strangers or business associates. Ethnographic research revealed
that CS is also a basis for constituting sociality in stateless, food-harvesting
societies, where ethnical, familial, and religious elements are the main
bonds (or group norm) that create and maintain a community.114 In modern
societies, CS manifests as the cooperative attitude towards a common
objective deployed by individuals within groups and institutions and relates
to the concept of organizational identity, according to which members of
an organization, including public authorities, share an understanding of
what characterizes their organization as distinctive and drives their
collective enterprise.115 Within this framework, members of a group
identify themselves under a common denominator — be it an ideology, a
shared identity, a cultural element, a mission, or a common interest — and
tend to change their behaviors to conform to the behaviors of the others.116
In larger communities, CS is also present. Stereotyped repetitive
actions, traditions, building of rituals, and general principles sustain group
membership and cohesion. There is often an idealization of a general social
norm that keeps the individuals of a group together under the ordering
principles of consensus, unity, and conformity. Upon this idealized social
norm — that glues the group to a common goal — develops the tendency of
the group to take actions that preserve and perpetuate its very existence. The
existence of conflict is not uncommon in CS and it limits the risk of
groupthink, which is a psychological phenomenon that occurs when
members of a group or a community, in order to avoid conflicts, impede
critical thinking.117 This may result in a dysfunctional decision-making
outcome, because the evidence challenging group’s assumptions and
113. The idea is advanced by Clark and Mills, see Interpersonal Attraction, supra note
108; Exchange and Communal Relationships, supra note 108.
114. See Michael E. Meeker, Kathleen Barlow & David M. Lipset, Culture,
Exchange, and Gender: Lessons from the Murik, 1 CUL. ANTHRO. 6 (1986); Fiske,
Structures of Social Life, supra note 17.
115. The concept is well established in the organizational literature, see Stuart Albert
& David A. Whetten, Organizational Identity, 7 RES. ORG. BEHAV. 263 (1985).
116. See Morton Deutsch & Harold B. Gerard, A Study of Normative and Informational Social
Influences upon Individual Judgement, 51 J. ABNOR. & SOC. PSYCHOL. 629 (1955).
117. See IRVING L. JANIS, GROUPTHINK: PSYCHOLOGICAL STUDIES OF POLICY DECISIONS AND
FIASCOES (Houghton Mifflin 1982).
2017]
EU Financial Regulators
99
supporting a specific action is uncritically discarded.118
Finally, Authority Ranking relationships reflect a hierarchy between
people who are ordered in a linear manner.119 In AR, individuals are either
above or below each other, depending on the social status attributed in a
specific context. Higher ranked individuals enjoy prestige, prerogatives, and
privileges that those in a lower position do not have. Military ranks are
epitomic of this relational model, which predominantly govern the
interactions between individuals working in the armed forces. There is a
stark difference with the relational organization encountered in both CS
and EM. In AR, resources are allocated depending on the ranking of
individuals instead of being traded, equally distributed, or pooled. When
AR features the decision-making process of a given group, information
moves upward towards the leader who, after assessing them, passes
decisions down through a chain of command. This dynamic has been
observed in situations where individuals emulate, obey, or even worship
superiors,120 but also in the political sphere, where the phenomenon has
been referred to as “authoritative democracy.”121 As noted by Weber, a
hierarchical organization could be imposed through coercion and unilateral
control of resources, but it may be accepted through a process of
ideological validation that recognizes and legitimizes a superior
authority.122 Ultimately, as noted by Freud, it may also spontaneously arise
within a group, when emulation of and identification with the leader
generate herd behaviors.123 In any cases, individuals in AR groups acquire
a sense of self-identity from knowing their place in the hierarchy.124
The four models often coexist and a group or an institution that
operates according only to one model appears to be a rare occurrence. A
combination of the models is more commonly observed in different aspects
118. A recent example offered by the literature, is the United States administration’s
assumptions, then followed by other countries, justifying the Iraqi invasion of 2003; Dina Badie,
Groupthink, Iraq, and the War on Terror: Explaining US Policy Shift toward Iraq, 6 FOR. POL’Y
ANALYSIS 277 (2010).
119. Fiske, Four Forms of Sociality, supra note 16, at 700.
120. See CHARLES HORTON COOLEY, HUMAN NATURE AND THE SOCIAL ORDER
(Transaction Publishers 1992).
121. BENJAMIN R. BARBER, STRONG DEMOCRACY: PARTICIPATORY POLITICS FOR A NEW
AGE (University of California Press 2003).
122. This is reflected in Weber’s distinction of three kinds of legitimate domination, i.e.,
legal, traditional, and charismatic; see MAX WEBER, ECONOMY AND SOCIETY: AN OUTLINE
OF INTERPRETIVE SOCIOLOGY 212—215 (Guenther Roth & Claus Wittich eds., University of
California Press 1978).
123. SIGMUND FREUD, GROUP PSYCHOLOGY AND THE ANALYSIS OF THE EGO (W.W.
Norton & Company 1975).
124. Fiske, Four Forms of Sociality, supra note 16, at 711.
100
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
of the social interaction. For instance, different social models may be
unconsciously used as templates to interpret the positions of other
individuals in the group, to judge or anticipate others’ actions, and
ultimately to engage in coordinated enterprises, or sabotage them. In this
respect, Fiske observes that the models are used together in a hierarchical
fashion through various phases of a social interaction or in distinct
activities within an institution.125 Albeit there is limited empirical evidence
on the specific driving elements determining what makes a group of
individuals opt for one of the models, or to switch from one model to the
next, it is reckoned that there is a consensus among individuals of a group
in identifying which form of interaction should be used in any given
circumstance.126 In other words, there are cultural and contextual rules that
are shared among members of a group and that drive individuals in
adopting one of the four relational models interactions. Drawing from
these observations it is possible to identify within the legal context of EU
financial regulators the dominant relational rules that underpin the
decision-making process of the considered EU bodies.
B. Models of Sociality in the Financial Regulation Framework
A distinct socio-psychological model is implicitly favored by the legal
framework for each one of the three categories of EU institutions we
isolated in the typology presented in Part II. The specific modus operandi
and the regulatory outcomes of EU institutions, is rooted in the
constitutional fabric of the EU. The allocation of powers, objectives,
duties, and tasks defines, together with the procedures regulating the
members’ appointment and their collective decision-making, a main
relational style for each category. More specifically, the following patterns
are observable: Communal Sharing is a dominant mode for institutions
engaged in recognizing the existence of the common interest; whereas
Equality Matching and Market Pricing are dominant for institutions
defining the content of the common interest, under the principles of mutual
recognition, and for institutions operating the common interest, where
regulatory and supervisory convergence occur through a balancing of the
interests of the community as a whole, with national and industry’s
interests. By contrast, due to the very nature of the EU legal framework,
Authority Ranking does not appear to be a dominant relational model in
125. Fiske, Four Forms of Sociality, supra note 16, at 701.
126. See ROBERT A. LEVINE, PROPERTIES OF CULTURE: AN ETHNOGRAPHIC VIEW
(Richard A. Shweder & Robert A. LeVine eds., Cambridge University Press 1984); Fiske,
Structures of Social Life, supra note 17.
2017]
EU Financial Regulators
101
any of the three categories elicited. This is not to say that there is not a
hierarchical organization in the EU legal order (or within its institutions); it
rather means that the linear ordering is minimal when the decision-making
organs driving regulatory and supervisory activities are observed.
However, it may be more pronounced in intra-institutional domains that
rest outside the scope of this analysis.
To shift the focus from the general categories to the relational modes
of specific regulators, EU institutions are here considered as groups of
individuals that organize themselves in collective structures, where the
achievement of one’s activity may only occur if other individuals perform
another task or activity.127 With the intent of isolating the relational
dynamics within the various collective structures engaged with the
governance of financial markets, the distinction between treaty-based
institutions and the other bodies appears to be particularly salient. The
Commission and the ECB are key treaty-based institutions in the new
European financial regulatory framework. Their activities and roles, as
regulators and supervisors, are defined within the constitutional provisions
contained in EU primary law.128 Alongside these institutions operate a
series of nontreaty—based institutions, i.e., the ESAs, the ESRB and
different network-based structures to coordinate the activities of national
authorities. It is worth highlighting that all EU institutions ultimately
concur in shaping the European financial regulatory space. The Court of
Justice, as earlier illustrated, has been called on to define the status of the
ECB, before the Lisbon Treaty, and the powers of the ESAs; the Council
represents the political forum where the regulatory policy agenda is set; and
the European Parliament holds key legislative functions approving or
putting a veto, for instance, on delegated legislative acts. New links are
also emerging, with the increasing practice of delegating and conferring
powers to the ESAs. It is clear that an analysis over the complex nexus of
legal and administrative procedures among these institutions would require
a detailed treatise that is beyond the scope of this work. This analysis,
instead, focuses on the relational arrangements within the EBA, the
Commission and the ECB.
127. This idea draws from Floyd H. Allport, A Structural Conception of Behavior:
Individual and Collective - Structural Theory and the Master Problem of Social Psychology,
64 J. OF ABNORMAL PSYCHOL. & SOC. PSYCHOL. 3 (1962). The idea that institutions are
groups of individuals has been also advanced by MARY DOUGLAS, HOW INSTITUTIONS THINK
Syracuse University Press (1986).
128. They are two of the seven main EU institutions enlisted in Article 13 of the TEU;
the other five being: the European Parliament, the European Council, the Council of the
European Union, the Court of Justice of the European Union (including the General Court
and the Court of Justice), and the European Court of Auditors.
Hastings Int’l & Comp. L. Rev.
102
[Vol. 40:1
Upon the basic distinction between treaty-based and nontreaty—
based institutions it is already possible to isolate the primary forms of
sociality characterizing EU institutions involved in financial regulation. As
the dynamics of any group of individuals, from families to companies, may
follow different form of sociality, so more than one form of sociality may
characterize the political, organizational and administrative activities of EU
institutions, and of the Union at large. Hence, EU treaty-based institutions
appear to be engaging with the logics of two primary forms of sociality:
communal sharing that is oriented towards the realization of the
community’s interests, and equality matching that aims at ensuring a
constant balance among Member States within these institutions. This
double (relational) dynamic reflects the duality of the function that EU
treaty-based institutions perform vis-à-vis the common interest. With
regards to the ESAs their ambivalent — and recently acquired — roles lead
to identify as primary form of sociality market pricing. In order to fully
appreciate the ramifications of this perspective, the governance of financial
markets in the EU is examined by looking at the socio-psychological
dimension that transpires from the EU constitutional framework. The
relational dynamics influencing the decision-making process of both treatybased and non-treaty based institutions in the context of EU financial
regulation and supervision are then considered.
i.
The Communal Sharing Form of Sociality and the EU
Constitutional Framework
In general, CS is a direct manifestation of the core features of the European
project from its modern genesis. Commentators have cogently noted that Van
Gend en Loos contains a proclamation of authority of a post-national community
whose attributes supersede those of nation-states and emanate from an idealized
notion of “common interest” —contained in the EU primary law — to justify an
increasingly larger scope of intervention.129 A different reading, one that may
well complement the one just illustrated, could be offered if the idea of common
interest is examined through the lenses of social psychology.
As earlier noted, the idealization of a social norm constitutes precisely
the core bond in CS. Notwithstanding the reasons driving individuals to
organize themselves within such a structure, the existence of a basic
principle — referred to as “group norm” —represents one of the conditions
of existence of a group.130 Individuals adhere to such a group norm that is
129. Chalmers & Barroso, supra note 49, at 105.
130. Allport, supra note 127, at 11.
2017]
EU Financial Regulators
103
generally flexible enough to adapt to new circumstances ensuring a
constant reciprocal rewarding, which in this context refers to a reciprocal
recognition of value among members participating within the same group.
Such a psychological mechanism facilitates the functioning of the group even
when individuals are not fully aware of the specific activities of other
members, but they are necessarily aware that their contributions converge
towards the common interest of the group.131 In focusing on the positions of
individual Member States the point may be easily missed. At the national level,
in fact, the debate often focuses on national interests that, following the narrative
of “limited sovereignty,”132 are in contrast to those pursued by EU institutions.
When a group perspective is acquired to study the decision making process the
idea of an underlying common interests emerges more distinctively.
The presence of conflicts and opposing interests is an element that
characterizes CS forms of sociality and may signal the lack of groupthink.
For instance, it is in pursuit of a common interest that divergent positions
converged into the establishment of a Banking Union, which requires
pooling more resources and the abdication of more sovereign powers
towards supranational authorities. Germany advocated for a more limited
authority for the ECB. In particular, given that the German banking market
is one of the less concentrated markets in the Eurozone, direct supervisory
powers over small banks, such as the Sparkassen (savings banks), appeared
as excessively intrusive to the German government.133 Similarly, the UK
supported the creation of a Banking Union amongst Eurozone countries to
strengthen the single market and ensure financial stability, albeit opposing
to subjecting to it. France, Italy, Portugal, and the Netherlands have
advocated for greater ECB powers.134 Once these positions have been
conciliated and a compromise (mostly political) has been reached, a
131. Allport, supra note 127 at 13—15.
132. In the UK, for instance, much of the discussion preceding the Brexit referendum
was based on the idea that the EU limits the sovereignty of its Member States. This position
has been eloquently rebutted in a report of the European Institute of the London School of
Economics and Political Science (LSE), which noted: “As a Member of the EU a state may
both enhance the sovereignty it retains, and have a say in the development and powers of the
club in those areas where sovereignty is shared or pooled.” Ever Closer Union Report of the
Hearing Held on 15th April, 2016, at 18, LSE Commission on the Future of Britain in
Europe, LSE European Institute, available at http://eprints.lse.ac.uk/66958/1/Hearing-10--Ever-Closer-Union-REPORT.pdf.
133. David Howarth & Lucia Quaglia, The Steep Road to European Banking Union:
Constructing the Single Resolution Mechanism, 52 J. COMMON MKT. L. REV. 125, 130—131
(2014).
134. See Aneta Spendzharova, Is More “Brussels” the Solution? New European Union
Member States’ Preferences About the European Financial Architecture, 50 J. COMMON
MKT. L. REV. 315 (2012).
104
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
unanimous consensus, is necessary under TFEU Article 127(6) to entrust
the ECB with new powers and competencies.
The general constitutional ethos, grounded on the concept of
community supported by an idealized interest that is autonomous from the
ones of its constituting members, is transposed to treaty-based institutions
that are called on to represent such a community as a whole. In particular,
the ECB and the Commission, pursue the common interest, however
intended, precisely through the realization of specified objectives that
shape their regulatory and supervisory action. The decision-making
processes to attain these objectives occur under the logics of structured
cooperation, which, as illustrated next, appears to be characterized by CS
and EM forms of sociality.
ii. The Treaty-Based Institutions and Communal Sharing
Form of Sociality
Although the Commission and the ECB are based upon different legal
grounds and have very different institutional settings to discharge their
respective tasks, their key constitutional features are designed to ensure the
pursuit of an interest that transcends the interests of the individual members
participating in the EU legal community. It follows that CS is one of the
dominant forms of sociality within these institutions because this relational
mode directly derives from the idea of Europe advanced by the Treaties.
Within the groups of individuals governing these institutions, structural
cooperation — whether it is created through legal mechanisms or anchored to
an effective shared identity — is a necessary feature to both administer pooled
resources and pursue the common interest by realizing the objectives mandated
by the community.
As earlier noted, the Commission acts as a guardian of and represents
the community’s interest, to the point that it defines itself as the
institutional embodiment the community;135 whereas the ECB preserves the
stability of the Eurozone, in the common interest of its members.136 Their
supranational status with extensive autonomy and independence separates
them from the individual members and entitles them to manage resources
that are pooled in the pursuit of a collective interest. This process occurs
through the principles of consensus, unity and conformity that characterize a
decision-making structure based on CS,137 and manifests itself in the status of
135. THE EUROPEAN COMMISSION: 1995-2000, 7 (European Commission 1995).
136. Lastra, supra note 62, at 1260.
137. Fiske, Four Forms of Sociality, supra note 16, at 697.
2017]
EU Financial Regulators
105
their civil servants. This determines a sense of the group in which individual
positions are channeled through a collective commitment which, in the case
of the Commission and the ECB, is precisely represented by the preservation
of the integrity of the single market. Also, in this case, the existence of
different positions within these bodies does not contradict the CS mode; it
rather represents an inherent phenomenon for decisions taken within a
collective structure.
iii.
The Treaty-Based Institutions and Equality Matching
Form of Sociality
A closer look at the organizational structures and decision-making
processes of the Commission and the ECB reveals that EM is also a
characterizing the relational dynamics within their respective decisionmaking organs, governed under the principle that distinct, but equal
individuals acknowledge their differences to reach an even balance.138 The
coexistence of CS and EM is not surprising as both the Commission and
the ECB have a role in pursuing the common interest and in the definition
of its contents.
Other than being the guardian of the common interest, the
Commission is also the engine of the Union, with its executive, policysetting, and quasi-legislative powers. Pursuant to the grounding provisions
establishing the Commission, it is composed of one Commissioner for each
Member State,139 now twenty-eight Commissioners,140 with one President
proposed by the European Council and elected by the Parliament.141 Under
this framework, Commissioners constitutes the College of Commissioners,
which makes all the decisions under the principle of “collegiality.” Even if
in practice there is little collegial discussion, any decision taken by the
Commission is a collegial decision, to which Commissioners could
contribute.142 However, this praxis has given rise to a host of well-known
138. Fiske, Four Forms of Sociality, supra note 16, at 705.
139. TEU, supra note 14, at art. 17(4).
140. As illustrated below, before the UK will formally leave the EU, i.e., two years after
the notification to the European Council of the decision to withdraw from the Union, the EU
is still composed of twenty-eight Member States.
141. TEU, supra note 14, at art. 17(5); TFEU, supra note 15, at art. 244(a), stipulating
that “Member States shall be treated on a strictly equal footing as regards determination of
the sequence of, and the time spent by, their nationals as members of the Commission.”
142. On the decision-making process within the Commission, see Arndt Wonka,
Decision-Making Dynamics in the European Commission: Partisan, National or Sectoral?,
15 J. EUR. PUB. POL’Y 1145 (2008).
106
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
concerns over the democratic accountability of the Commission and the
politicization of its decision-making process within the College of
Commissioners, where the collegiality principle remains, in most cases, a
mere black letter.143
The socio-psychological perspective sheds new light over these issues
that are defined by specific behavioral patterns. The decision-making
structure of the Commission follows the principle one-person equals to
one-vote within the College. This indicates that the EM shapes the
qualitative dimension of interpersonal relationships and operates as a
mechanism for social influence. It follows that when individuals receive a
favor or a concession they feel obliged to reciprocate in order to ensure balance
and equality among group members.144 This in turn may discourage formal
discussions; questioning the decisions proposed by one or more
Commissioners may be perceived to slowdown the realization of the
Commission’s objectives, affecting the overall balance of interpersonal
relationships. To put it differently, this form of sociality, governed by
reciprocity and equality, encourages exchanges and a, more or less explicit,
bargaining process, that has been observed in the College of Commissioners.145
Traditional game theory would explain this phenomenon as a repeated
game, in which players know that a momentary concession will correspond
to a “side payment” or compensation in the future. Under this light, players
aim at getting the best personal outcome and maximize their utility
functions by making choices in consideration of any future compensation.
Fiske’s models provide for a more sophisticated and, possibly, complete
explanation. The ultimate goal within an EM relational mode is the
equilibrium of the entire social group. As noted, such an end also
encompasses considerations over the fairness and the equality of the outcomes
— rather than being limited to the maximization of two (or more) players’
utility functions. The activity of the group and its very existence is determined
by such a tension towards an overall balance, where lack of reciprocity or a
perceived unfairness could result in social sanctioning, given that they
ultimately compromise the survival and the operability of the group. Hence,
what from an outsider’s viewpoint might be perceived as politicization based
on a series of concessions, within the group, it is the essence of a structured
143. See, eg., Fabio Franchino, Delegating Powers in the European Community, 34 B. J.
POL. S. 269 (2004); Susanne K. Schmidt, The European Commission’s Powers in Shaping
Policies,in THE CHANGING EUROPEAN COMMISSION 105 (Dionyssis G. Dimitrakopoulos ed.,
Manchester University Press 2004).
144. See Karen S. Cook & Eric Rice, Social Exchange Theory, HANDBOOK OF SOCIAL
PSYCHOLOGY 61 (John DeLamater & Amanda Ward eds., Springer 2013).
145. See Wonka, supra note 142.
2017]
EU Financial Regulators
107
cooperation that justifies the existence of the group and its decisions.
The EM relational mode can also be found in the ECB governing
organs. Within the ECB there are three decision-making organs, namely: i)
the Governing Council, which is entrusted with the power of formulating
monetary policy for the Eurozone, defining guidelines for national central
banks operating in the European Central Banks System, and, under the
newly established SSM, setting the general framework under which
supervisory actions are conducted and objecting the decisions proposed by
the Supervisory Board; ii) the Executive Board, whose role is to implement
the guidelines established by the Governing Council and coordinates
national central banks; and iii) the newly established Supervisory Board
that coordinates the supervisory activities under the SSM. The Supervisory
Board is composed of eighteen country’s representatives plus a Chair, a
Vice-Chair and four representatives of the ECB not involved in monetary
tasks. The aim is to create a Supervisory Board that is in line with the EU
constitutional framework that attributes, under TFEU Article 127(6),
supervisory functions to the ECB, and independent enough from the
monetary policy tasks conducted by the ECB in order to avoid conflict of
interests between banking supervision and monetary stability. 146
The Governing Council is the primary decision-making body and
is composed of the governors of the national central banks that are a
part of the Eurozone, plus the members of the Executive Board
(President, Vice-President and four other independent individuals). 147
Governors shall not represent the interests of their country and they
are members in their capacity as independent experts. Members of the
Board are independent and are appointed for eight years, 148 which
exceeds the terms of any national government as well as the terms of
any other European institutions. In order to avoid coalitions among
Member States the Executive Board sets the agenda and, since
Lithuania’s accession to the Eurozone as of 2015, the voting follows a
rotating system capped at twenty-one voters. Governors are allocated
to different groups based on the size of their country’s economy and
financial sector. As long as the Eurozone has between eighteen and
twenty-one participating countries there are two groups. The five
largest countries constitute the first group and they share a total of
four voting rights that rotate monthly. 149 Thus, every month one of the
146. A mediation mechanism has been also established, when the Governing Council
and the Supervisory Board are in disagreement.
147. TFEU, supra note 15, at art. 283(1).
148. Id. at art. 283(2).
149. The countries in this group are France, Germany, Italy, the Netherlands, and Spain.
108
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
governors of the five largest countries would not vote, but may
participate in the discussion. The remaining governors share a total of
eleven voting rights, which also rotate on a monthly basis. The six
members of the Executive Board are permanent voters. This creates a
system based on a collective decision-making process where one
person is equal to one vote; although non-voting countries are
determined through a frequency that changes depending on the
dimension of the country. Members of the Governing Council may
predict when they will not vote, but they are naturally unaware of the
decisions on which they will be asked to vote. Hence, decisions are
taken under what resembles a ‘veil of ignorance’ that sustains the EM
form of relationship.150
iv. Non-Treaty-Based Institutions and Market Pricing
Form of Sociality
The ESAs and the ESRB have been established under TFEU Article
114, which allows treaty-based institutions to delegate specific task to ad
hoc created authorities, as long as they are devices to serve the
community’s interest of protecting the single market through the
harmonization of EU law. It follows that the ESAs and the ESRB are, from
a constitutional perspective, means to achieve the general interest and,
following the categorization offered in Part II, they operate the common
interest by ensuring regulatory and supervisory convergence.
We argue that these institutions, which are not included in the
pantheon of EU institutions enshrined in the Treaties, operate mainly under
the MP form of sociality. We focus mainly on the example of the ESMA,
which has broad powers. It drafts technical standard, advances proposals,
and issue ‘comply or explain’ notices, which hardens non-binding
guidelines and recommendations that could be also adopted.151 ESMA
shares common elements with EU agencies, including a strong reliance on
technical expertise, legal personality, degree of independence, and
procedures to be followed by its governing organ.152
These features, together with ESMA’s broad powers, are of particular
relevance to analyze the sociopsychological model of this institution.
Whereas the treaty-based inter-institutional lawmaking process is designed
150. Fiske, Four Forms of Sociality, supra note 16, at 705.
151. ESMA Regulation, supra note 33, at art. 16.
152. For a thorough analysis over the mechanisms and the functioning of ESMA, see
Moloney, supra note 91.
2017]
EU Financial Regulators
109
to produce high-level principles and is inspired in its dynamic by common
ideals,153 administrative rule-making in the securities and markets sphere,
produced with a major role of ESMA, is more technical and inspired by
economic considerations. This characteristic is likely to tip the culture at
ESMA toward Market Pricing. Overall, it can indeed be observed that
securities and market regulation is primarily directed to the support of
market efficiency, transparency and integrity as well as to the protection of
consumers and investors.154 The traditional justification for regulatory
intervention, in financial as well as other markets, relies on the idea that a
regulatory intervention is necessary to correct market failures.155 Those are
situations in which markets fail to reach an optimal equilibrium and, as a
consequence, allocation of resources ceases to be efficient. This may occur
for various reasons. For instance, when financial instruments may not be
correctly priced by market participants due to asymmetric information, or
when “the well-being of one economic agent (consumer or firm) is directly
affected by the actions of another” that results in negative externalities.156 It
also occurs when a diffused financial instability is generated by a market
participant’s failure. Following this rationale, a regulatory intervention is thus
required and justified. Conduct of business rules, consumers and investors
protection standards as well as regulations affecting the governance of
financial institutions, their solvability and possible failures are grounded on
this rationale and necessarily impose a level of expertise to draft detailed
provisions that are intended to correct markets’ imperfection, by steering
the behaviors of financial entities while ensuring their economic viability.
The hypothesis that an MP mode of sociality characterizes ESMA is
further confirmed by the structure of the institution. ESMA’s primary
decision-making organ is the Board of Supervisors, composed of the heads
of Member States’ supervisors, defined as National Competent Authorities
(NCAs). The Chairperson of ESMA sits on the Board and chairs the
meeting, although with no voting right. The Board also includes
153. The treaty-based inter-institutional lawmaking process elements are intergovernmental
(the Council), representative (the European Parliament), and supranational (the Commission).
154. Bernard S. Black, The Legal and Institutional Preconditions for Strong Securities Markets
48 UCLA L. REV. 781 (2001). See also, for the policy perspective, Mitigating Systemic Risk. A Role
for Securities Regulators, International Organization of Securities Commissions (IOSCO) (Feb.
2011), http://www.iosco.org/library/pubdocs/pdf/IOSCOPD347.pdf.
155. On the rationale (and its limits) of markets failures to justify regulation, see, e.g.,
Baldwin et al. supra note 10; ANTHONY I OGUS, REGULATION: LEGAL FORM AND ECONOMIC
THEORY (Bloomsbury Publishing 2004).
156. John Kay & John Vickers, Regulatory Reform An Appraisal, DEREGULATION OR REREGULATION: REGULATORY REFORM IN EUROPE AND THE UNITED STATES, 221—226
(Giandomencio Majone ed., St. Martin’s 1990).
110
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
representatives (with no voting rights) of: the Commission (as for any EU
agency), the ESRB, EBA, and EIOPA. With such a configuration, the
Board combines the scientific expertise functions with political oversight,
two functions that are usually separated. The Board gives guidance to the
work of ESMA, adopts opinions, recommendations, decisions and advice.
The Board operates under a simple majority vote; each Board member has
one voting right and they are all required not to advance the interest of their
respective Member States.157 Alongside the Board of Supervisors, there is
the Management Board which is composed of the Chairperson and six
members of the Board of Supervisors. The members of the Management
Board are elected by the voting members of the Board of Supervisors.158
Also in this case, the Commission and the Executive Director participate in
meetings, but have no voting rights.159 The Management Board operates on a
simple majority rule basis. The Management Board has to propose for adoption
by the Board of Supervisors an annual and multi-annual work program. In
addition, to facilitate consultation with stakeholders, ESMA has established a
consultative Securities and Markets Stakeholder Group (SMSG).160 It is consulted
in practice by ESMA on various matters, including technical aspects. The
dialogue with stakeholders and experts evidences the importance granted to market
participants in defining the rules through which financial markets may function.
This description enables us to understand the double nature of ESMA,
and the other two ESAs in general.161 First, it is a body in charge of
building EU common rules and as such it should “protect the public interest
by contributing to the [. . .] stability and effectiveness of the financial system,
for the Union economy, its citizens and businesses.”162 Moreover, ESMA
should act independently and autonomously “in the sole interest of the Union
as a whole” without seeking instructions from other European institutions or
from Member States.”163 In its 2011 annual report, ESMA identified the six
characteristics as to how it achieves its mission and objectives: independently,
cooperatively, with accountability, professionalism, and effectiveness.164 The
identification of specific operational rules and guiding principles against which
157. ESMA Regulation, supra note 33, at art. 44(1).
158. Id. at art. 45(1).
159. Id. at art. 45(2); However, according to Article 45(3), the representative of the
Commission has voting rights on matters related to the ESMA’s budget.
160. Id. at art. 37.
161. The provisions here analyzed are also contained in the regulations establishing the
EBA and the EIOPA.
162. ESMA Regulation, supra note 33, at art. 1(5).
163. Id. at art. 42 para 1.
164. European Securities and Markets Authority Annual Report 9, (2011).
2017]
EU Financial Regulators
111
ESMA regulatory activity is benchmarked points towards a prominence of
a modus operandi characterized by an MP relational mode.
Second, notwithstanding the intergovernmental ethos, representatives
of NCAs on the Board of Supervisors are naturally incentivized to take into
account, if not promote, their national positions. In fact, ESMA’s resources
are limited and its working model is dependent on NCAs resources.165 The
pressure for adopting certain measures, and to allocate resources in a manner
that is in line with national interests, ensures the necessity for a decision
making process based on negotiation among the members of the Board, i.e.
the representatives of NCAs. The resulting organizational structure naturally
leads to a bargaining culture that is a primary characteristic of MP, whereby
motives based on the pursuit of individual interests may overbear the search
for an overall balance. This is further evidenced in some of the
observations advanced in the 2013 Mazars ESA Review.166 The Review
stressed the importance of reaching a balance between EU-wide and
national interests.167 As earlier noted, similar considerations have been
advanced towards another ESA, i.e., the EBA. Also in this case, the sociopsychological perspective advanced here reveals that bargaining is a natural
manifestation of a group dynamic in which multiple individual interests are
more prominent (and tangible) than the pursuit of an idealized common
interest. The problems related to the growing role of the ESA, hence,
appear to reside in the compromise between the interests of Member States
and those of the Union. Absent an institution that represents the common
interest also in the processes of regulatory and supervisory convergence, an
“exchange relationship,” either based on EM or MP, is expected.
IV. Regulators in Crisis: a Sociological and Psychological
Perspective
The relational models appear to be useful, not only to describe more
accurately the dynamics driving the decision-making process of EU bodies
involved in financial regulation; they also offer a conceptual framework
that sheds light over the development of conflicts amongst Member States,
or groups thereof, when their representatives participate in collective
structures. Conflicts appear to arise and be managed following specific
behavioral patterns that can be ascribed to each dominant form of sociality.
165. ESMA Regulation, supra note 33, at art. 62(1).
166. See generally, The European Supervisory Agency, Review of the New European
System of Financial Supervision, Mazars (2013).
167. Id. Part 1 at 14.
112
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
This is to say that, for a given disruption in the expected relational dynamics
within an institution, direct or indirect consequences within the group may be
isolated. For instance, if one or more members of the group characterized by
the CS or the EM relational archetypes does not follow the appropriate group
norm, other members of that group are likely to sanction them or the group
is likely to fracture into sub-groups. In this schema, it is assumed that the
group continues to operate and the collective structure does not
immediately cease to exist.
In this respect, the current Brexit debate — preceding and following
the result of the referendum of June 23, 2016, when the UK voted to leave
the EU — offers a perfect case study to examine how different, and often
antithetic, positions advanced by EU Member States influences the group
dynamics operating within different EU institutions and bodies.168 At the
time of writing (October 2016), the UK has signaled that it does not share
the common interest upon which the Union is constructed. As further
elaborated below, this emerges not only from the result of the June
referendum, it also transpires from the official talks preceding the public
vote. However, given that the formal withdrawal procedure enshrined in
TEU Article 50 has not been activated, the UK is still a member of the
Union. Hence, the UK is still participating in most of the official meetings
of the European Council and its representatives still hold positions in EU
institutions, such as the Commission and the ESAs. EU officials and
governments of Member States have made clear on multiple occasions that
no informal negotiation over the future UK-EU relationships will be held
before the UK will formally notify its intentions of leaving; a possibility
that seems likely to occur by the end of March 2017.169 From that moment,
pursuant to TEU Article 50, there is a window of two years to define the
UK-EU relationships, after which the UK will be effectively out of the
Union, with or without a deal with the Union of twenty-seven countries.170
In this context, while the Union still performs its tasks and functions
relying on an institutional setting designed for twenty-eight countries, the
168. For a first assessment of the possible implications of Brexit, see Niamh Moloney, Financial
Services, The EU, and Brexit: An Uncertain Future For The City? 17 GER. L.J. 75 (2016).
169. Jenny Gross & Nicholas Winning, U.K.’s Theresa May Pledges to Set EU Divorce
in Motion by End of March, WALL ST. J. Oct. 2, 2016.
170. In particular, TEU art. 50 para 3 states: “The Treaties shall cease to apply to the State in
question from the date of entry into force of the withdrawal agreement or, failing that, two years after
the notification […], unless the European Council, in agreement with the Member State concerned,
unanimously decides to extend this period.”
For an analysis over the mechanism put forward by TEU art. 50, see European Parliament,
Brief: Article 50 TEU: Withdrawal of A Member State From The EU, European
Parliamentary Research Service PE 577.971 (Feb. 2016).
2017]
EU Financial Regulators
113
position of the representatives of the UK in different decision-making
organs is peculiar. A black-letter analysis of the constitutional framework
governing the EU is not sufficiently equipped to grasp such a complex and
uncertain political situation.171 In turn, by enriching the legal analysis with
a socio-psychological perspective over the group dynamics within
institutions provides a much deeper understanding of an unfolding debate
that will have ripple effects in the years to come.
A.
The Development of A Divide
In general terms, the primary source of tension in EU institutions
derives from the emergence and the consolidation of two groups of
countries, notably Eurozone countries and non-Eurozone countries. This
divide may be observed in different instances ranging from the closed
borders of a common monetary policy to reach critical aspects of financial
regulation and crises resolution. Within the EU, the interests of the
Eurozone and those of the single markets are not necessarily aligned.
Distinguished commentators have noted that the decisions taken to
safeguard the former also have an impact on the latter, although the input
of non-Eurozone countries in the decision-making process is limited, if not
absent.172 This situation may be described as a misalignment within the
various possible definitions of the contents of the common interest: the
recent financial, euro, and sovereign debt crises accentuated centrifugal
forces potentially separating non-Eurozone countries from the rest of the
Union.
The inclusion of financial stability within the perimeters of the
common interests is particularly pronounced for Member States that are
taking part in the SSM. The preservation of financial stability is
constructed as deriving from the maintenance of the integrity of the single
market. However, the interconnection between the banking sector,
sovereign debts, monetary policy, and the single currency required
Eurozone countries to design responses that are tailored to preserve the
monetary union, mostly through further integration. For Eurozone
countries the primary concern has been to break the link between the
banking sector and sovereign states, whereby public funds are required to
171. For an overview of the different political positions and their possible implications
on the UK financial industry, see Thomas F. Huertas, Brexit v the City: A Fight With One
Winner, FINANCIAL TIMES, Oct. 26, 2016.
172. Paul Craig & Menelaos Markakis, The Euro Area, Its Regulation and Impact on
Non-Euro Member States, RESEARCH HANDBOOK ON THE LAW OF THE EU’S INTERNAL
MARKET (Edward Elgar ed., 2016) (on file with author).
114
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
bail out troubled banks by deepening the national debts and compromising
monetary stability.173 Hence, the establishment of the Banking Union has
strengthened supervisory convergence through an increased attribution of
powers at the supranational level. Drawing from the relational archetypes
and with reference to the three main layers that posit EU institutions at
different distances from the common interests, it is possible to examine how
this divide within the Union affects the decision-making process and, more
generally, the relational dynamics within institutions.
When CS operates, there is equality among members, which are units
with the same weight and not ranked or organized under a hierarchical
structure. As a result, the decisions made are unitary, in the sense that they
represent the whole rather than the result of bilateral bargaining. This
equivalence derives from a group norm that determines a sense of belonging
towards the group or the community and, ultimately, legitimizes its very
existence.174 Prolonged dissent may weaken the strength of the whole
community in two intertwined fashions. First, dissent shows a disagreement
towards the group norm upon which the collective structure is established.
This makes the participation into the group less rewarding and may
ultimately lead one or more individuals to withdraw from the group.175
Second, constant dissent leads to undermining the relational equivalence
among members and signals a lack of sense of belonging. 176 Hence, the
principles of proportionality and equality among members of groups
operating under EM relational modes also enter into crisis. Within the
European institutional framework earlier described, this means that if the
existence of the common interest stipulated in the Treaties and justifying
the existence of supranational apparatus is compromised, decision-making
organs entrusted with the powers to define the contents of such a common
interest are also compromised.
The problem emerges clearly from the impact that the UK vote to leave the
EU had immediately on the College of Commissioners. The Commissioner for
the UK, Lord Hill, held the crucial role of advancing the financial regulatory
agenda of the Union, being Commissioner for Financial Stability, Financial
Services and Capital Markets Union. After the results of the referendum, Lord
Hill, who was one of the key promoters of the Capital Markets Union, resigned
173. In the landmark Euro Area Summit, Eurozone countries stated: “We affirm that it is
imperative to break the vicious circle between banks and sovereigns.” Euro Area Summit
Statement, at 1, June 29, 2012, available in full at http://www.consilium.europa.eu/uedocs
/cms_Data/docs/pressdata/en/ec/131359.pdf.
174. Allport, supra note 127, at 14.
175. Id. at 11.
176. Fiske, Four Forms of Sociality, supra note 16, at 697.
2017]
EU Financial Regulators
115
and Mr. Dombrovskis (Latvia), Vice-President of the Commission and
Commissioner for the Euro and Social Dialogue, has taken over his position.177
Given that the UK is still part of the EU a new UK Commissioner for the
Security Union has been appointed, Sir Julian King.178 However, from the
Mission Letter from the President of the Commission, it emerges that the new
Commissioner will be mostly in charge of implementing “concrete operational
measures,”179 rather than focusing on policymaking. Moreover, Sir Julian will
not represent the Commission in the European Parliament and at meetings of
national ministers; a crucial role maintained by the previous Commissioner.180 It
is clear that the representative for the UK in the College of Commissioners is not
anymore considered as formally equal, i.e., with the same powers and
prerogatives, to the other Commissioners. His role has been ultimately curtailed,
thus weakening the equality paradigm that characterizes a group dominated by
the EM form of sociality.
Such an epitomic case explains a broader dynamic. Once the common
interest is understood as the group norm bonding the Union together as a
legal community and driving the decisions of treaty-based institutions, the
socio-psychological standpoint explains how a sharper distinction between
Eurozone and non-Eurozone countries polarizes the decision-making process
in two sub-groups. As a result, a conflict between “insiders” and “outsiders”
in the Eurozone may emerge in institution where all Member States are
called on to cooperate, even when the decision making process is dominated
by a relational mode that is not CS. Within such groups, the existence of a
profound dissent not only affects the political relationships among Member
States, but it is likely to call into question the very existence of both a shared
bond and the equal relation that ensures the cooperation among its members.
The erosion of the common interest — real or idealized — upon which the EU
is constructed has therefore cascading consequences throughout the different
decision-making centers of the EU institutional framework.
177. Jim Brunsden, UK’s EU Commissioner Lord Hill Quits as British Departures Begin,
FINANCIAL TIMES, June 25, 2016; Jim Brunsden, Brexit Gives Valdis Dombrovskis Big Sway
Over Banks, FINANCIAL TIMES, June 30, 2016.
178. Mehreen Khan, Juncker To Appoint New UK Commissioner As ‘Security’ Chief,
FINANCIAL TIMES, Aug. 2, 2016.
179. Mission Letter from Jean-Claude Juncker, President of the European Commission,
to Julian King, Member of the European Commission at 4 (Aug. 2, 2016), available at
http://ec.europa.eu/priorities/sites/beta-political/files/king_en.pdf.
180. Id. at 5.
116
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
B. The Experience of Centrifugal Tensions: “Insider vs.
Outsider”
The existence of Member States that partake in only some features of
the Union is not new in the history of the EU and is often referred to as a
phenomenon of differentiated integration. Accordingly, Member States may
opt for different levels of integration ensuing different levels of abdication of
state prerogatives, on specific matters, towards the supranational institutional
apparatus.181 Differentiation characterizes the genesis of the EU that from a
small group of founding members progressively enlarged and conflated
different communities into a supranational union. In this process different
opt-out clauses, notably to the Schengen Agreement and to the monetary
union, have been granted to Member States. Nonetheless, the division
between countries that adopted the euro and countries that opted out is
becoming more pronounced. Following the recent crises and the
establishment of the Banking Union the risk of a two-speed Europe has
been particularly strong. There is even a risk for differentiation to evolve
into fragmentation, as already witnessed in the discontent that has animated
the debate over the UK leaving the Union. With the Brexit vote,
fragmentation is now becoming a tangible risk that the EU has to tackle.
Aside from any speculation over the possible future of the UK and the
EU as a whole, the theory of the forms of sociality applied to EU financial
regulators helps to identify an increasingly sharp division within groups of
individuals entrusted with decision-making powers. Such a division
implies that outsiders, i.e., countries not participating in a given project
harden their positions, while insiders, i.e., countries partaking in the new
project, expect the former to join.182 Beyond this, a sociopsychological
standpoint indicates that the differentiation between outsiders and insiders
may induce insiders to concentrate around a new shared interest that
defines a new bond, or even a new common identity, which, in turn, is
further legitimized by the existence of outsiders not sharing such a bond,
whose common interest may harden as well towards a new shared objective.183
181. See Benjamin Leruth & Christopher Lord, Differentiated Integration in the
European Union: A Concept, a Process or a Theory? 22 J. EUR. PUB. POL. 754 (2015);
Frank Schimmelfennig, Dirk Leuffen & Berthold Rittberger, The European Union as a
System of Differentiated Integration, Politicization and Differentiation, 22 J. EUR. PUB.
POL. 764 (2015); Jean-Francois Jamet, The Optimal Assignment of Prerogatives to Different
Levels of Government in the EU, 49 J. COMMON MRKT. STUD. 563 (2011).
182. Thierry Chopin & Christian Lequesne, Differentiation as a Double-Edged Sword:
Member States’ Practices and Brexit, 92 INT’L AFF. 531 (2016).
183. Fiske notes that CS, in its extreme form, may imply “a contrast between the subjective
‘we’ and the objectified ‘they.’” Fiske, Four Forms of Sociality, supra note 16, at 699.
2017]
EU Financial Regulators
117
The unfolding events concerning Brexit offer a powerful illustration of such a
group dynamic. A progressive crystallization of different positions around
new or reinforced shared objectives emerges from the declarations of
European politicians during the current talks, preceding the formal
commencement of the EU-UK negotiations. In particular, reports over the
alleged stance of EU negotiators to use French, rather than English, as the
official language of the negotiation process regarding the EU-UK
relationships signals, other than a possible pre-negotiation tactic, the search
for a new group identity for EU Member States.184 Likewise, the
polarization of a group around a hardened common interest, towards which
individual interests converge and are superseded, is apparent if one
considers that negotiations will be conducted between the EU — a block of
twenty-seven countries that is expected to act, by virtue of the legal
obligations established in the Treaties, as a unitary entity protecting its
existence — and the UK, a single sovereign state. This polarization is
exemplified by the fact that the first meetings of the European Council after
Brexit — on June 29, 2016 (Brussels) and on September 16, 2016,
(Bratislava) — were held informally, without the participation of the UK.
They led to what has been labeled as the Bratislava Declaration and
Roadmap that deals with the new institutional setting of the Union.185 The
Declaration reaffirmed the necessity of pursuing a common interest and of
also correcting the flaws of the EU, but without putting forward any
concrete policy decision.186 In contrast, during the recent official meeting
of the European Council with all twenty-eight Member States (Brussels,
October 20 and 21, 2016), Brexit talks were left at the end of the agenda
and itemized as reflections “on the future of the EU with twenty-seven
member countries.”187
184. Francesco Guarascio, Parlez-vous Brexit? EU Negotiator Wants Brits to Talk
French, REUTERS, Oct. 21, 2016.
185. European Council, Bratislava Declaration, 1 (informal meeting, Sept. 16, 2016), available
at http://www.consilium.europa.eu/en/meetings/european-council/2016/09/16-informal-meeting/.
186. In particular, the Bratislava Declaration opens with the following statement:
“Although one country has decided to leave, the EU remains indispensable for the rest of us.
In the aftermath of the wars and deep divisions on our continent, the EU secured peace,
democracy and enabled our countries to prosper. […] We are determined to make a success of
the EU with 27 Member States, building on this joint history [emphasis added].” Id. at 1. Two
crucial aspects may be noted from this incipit. First, the locutions “one country” contraposed to
“the rest of us” (or “our continent”) point towards a hiatus between a de-individualized outsider
and the subjective insiders; on that aspect see Juncker’s Speech, supra note 173. Second,
reference to the “wars and deep divisions” (as well as to the “joint history”) echoes the Schuman
declaration of 1950; see supra note 44 and accompanying text.
187. See Donald Tusk, President of European Parliament, Remarks of The President of
The European Parliament Following The European Council Meeting (Oct. 20—21, 2016).
118
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Leaving aside the current debates concerning Brexit, the dynamics and
legal implications of which are beyond the scope of this work, the
agreement, reached by the UK Prime Minister during the European Council
(February 18 and 19, 2016) as a condition for the UK to remain, already
signaled a misalignment between the interests of the EU and those of the
monetary union.188 Such a separation is sustained by the general opt-out
for the UK on an ever closer Union.189 Even more, it is expressly stated
that reference to an ever closer Union contained in the Treaties does not
constitute a legal basis for expanding the scope, the competencies, or the
powers of the EU and of its institutions.190 Among the various items of that
agreement, of particular interest for the purposes of this analysis are those
defining the perimeters of the Banking Union and the relationships between
Eurozone and non-Eurozone countries. In this respect, the agreement
advocates for a stronger protection for the latter group of Member States; and,
hence, a sharper separation between the two groups. The agreement, albeit
recognizing the necessity to deepen the monetary union supported by a
Banking Union, reaffirms the already established principle of
nondiscrimination towards non-Eurozone Member States and the possibility of
creating a European Union where the regulation and supervision of banking
institutions follows two separate paths. Moreover, the agreement also
reaffirms a principle already encountered in the OLAF decision and
according to which the EU institutions involved in the governance of the
Eurozone should be subjected to EU Law at large, and their decisions
should involve non-Eurozone Member States when affected. What is
certain is that the completion of the Brexit process calls into question the
applicability of the protections against discrimination based on location and
currency for the UK financial services industry.191
The legal implications and the effective departures from the existing
EU legal framework if the agreement would have been enforced are
impossible to ascertain; ultimately, given the current circumstances, the
188. European Council, Conclusions, Brussels (Feb. 19, 2016).
189. The agreement commences the section titled “Sovereignty” with the following statement:
“It is recognised that the United Kingdom […] is not committed to further political
integration into the European Union. The substance of this will be incorporated into the
Treaties at the time of their next revision […] so as to make it clear that the references to
ever closer union do not apply to the United Kingdom.” Id. at Annex 1, p.16.
190. Id.
191. On the possible impacts on and opportunities for the UK financial services industry
following the completion of Brexit see Eilís Ferran, The UK as a Third Country Actor in EU
Financial Services Regulation (University of Cambridge, Faculty of Law Legal Studies
Research Papers, Paper No. 47/2016, 2016), available at https://papers.ssrn.com/sol3/paper
s.cfm?abstract_id=2845374.
2017]
EU Financial Regulators
119
document represents a legal memorabilia. As such, however, the
agreement may be interpreted as a request for enhanced transparency and
participatory accountability amongst Member States with different
priorities. Nonetheless, a divide within the Union emerges distinctively
when the agreement and its language are juxtaposed to the agenda set forth
in the Five Presidents Report issued by the Commission in 2015.192
The Report, which still marks the agenda of the EU, posits a greater
level of integration to strengthen economic and monetary union as primary
items of the EU agenda. It is envisaged as an action plan in three steps to
establish a fiscal union, a capital markets union, and, more generally, a
financial union that should be paired with a reinforced representation of
Eurozone Member States in international fora, e.g., at the IMF, and within
the EU, with more structured governance bodies; and, interestingly,
culminates with a 2025 goal of having a stronger single currency that is
“attractive for other EU Member States to join if they are ready to do
so.”193 The resulting division amongst different groups of Member States
seems to progressively polarize, as the theory of social relations would
predict, around two group norms. One is represented by the pursuit of a
common interest that, in order to achieve financial stability and monetary
union, requires further integration; whereas the second group intends the
common interest as more limited and primarily based on economic and
trade interests that are necessarily shared. The latter group includes
Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania,
and Sweden,194 but it may also include the UK, shall the UK continue to
have access to the single market, or to be part of it. The exact contents of
such a more contained common interest depends on many variables that
may open to different future scenarios.
It may already be noted that the establishment of a Banking Union and
the project for a Financial Union, may be understood as a reinforcement of
the group norm bonding (some) members of the EU legal community, which
192. Jean-Claude Junckeret et al., President of the European Commission, The Five
President’s Report: Completing Europe’s Economic and Monetary Union (2015).
193. Id. at 5.
194. Under the Maastricht Treaty, any country joining the EU is obliged to adopt the
euro provided that they fulfill the convergence criteria (including price stability, soundness
and sustainability of public finances, durability of convergence, and exchange rate stability).
Denmark and the UK obtained an opt-out to the Maastricht Treaty. Hence, since the
moment Brexit will be effective, only Denmark is exempted from joining the Eurozone.
Thus, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, and Sweden will join
the Eurozone eventually. However, the Global Financial Crisis has halted this process of
convergence rendering uncertain when these will adopt the single currency. For a review of
the different levels economic integration and the legal framework of these countries, see
Convergence Report 2014, EUROPEAN CENTRAL BANK (Frankfurt, 2014).
120
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
encompasses sovereign entities as well as regulated industries. This greater
level of integration is usually justified by the necessity of increasing the
resilience of European markets towards financial crises.
From a
sociopsychological perspective, a reinforcement of the group norm also
represents a step against the possibility of fragmentation of the community
(especially felt after the UK referendum) whether it arises from either external
factors, or dissent within the group, or a combination of both. It follows that
members participating in the Banking Union, or in any new project leading
to a stronger integration, are subjected to an “enhanced group norm,”
according to which the common interest is achieved also through
regulatory and supervisory convergence.
The emerging divide is carried through the decision-making process of
EU bodies and agencies involved in financial regulation. The different
priorities and understandings of the group norm are to influence the relational
dynamics both between and within EU institutions, where the representatives
of Eurozone and non-Eurozone states cooperate. Hence, widening the gap
with nonparticipating countries may result in a higher level of dissent and in
a weakened equivalence relationship in the EU architectural framework for
financial regulation.
V. Conclusion
Attempts to describe the behaviors and the group dynamics driving the
decision making process of regulators — and, in particular, EU financial
regulators — have been sketchy and disappointing, as the minute
comparison of different regulatory approaches or the game metaphor, albeit
offering useful insights, do not enrich our understanding. Our work uses
the rich vocabulary and conceptual frameworks of psychology as it
approaches financial regulation in the EU from a sociopsychological
perspective. Regulators are considered as collective groups of individuals
and, as such, they respond to the fundamental forms of sociality defining
any human interaction. Through these lenses, principles for interpersonal and
inter-institutional cooperation, membership criteria, organizational structures
as well as shared goals and objectives shape decision-making for regulators.
Such principles are formalized in the legal framework, primarily through the
definition of regulators’ remits and procedural provisions.
In turn, the legal framework appears to have an impact on the fashions
in which social interactions occur. Dominant forms of sociality may be
identified and specific behavioral patterns emerge for each of the
institutions here examined. This explains, under a novel perspective, some
of the common issues affecting the EU governance apparatus, such as the
2017]
EU Financial Regulators
121
expanding definition of the common interest, the politicization of the
Commission, the issues related to the new supervisory agencies (ESAs), and
the impact of Brexit on the intra-institutional decision-making process of
financial regulators. Moving from this first attempt to apply social
psychology to shed some light on regulators, it is our hope that further
investigations will be conducted in what appears to be a new approach to
regulation studies.
In the context of financial regulation, it emerges that the relational
structures of EU bodies and institutions are affected by their constitutional status,
membership rules, and the functional relation they perform vis-à-vis the
common interest. Furthermore, different interpretations and understandings of
the common interest that have been coexisting are now generating a divide
between Eurozone and non-Eurozone Member States now emphasized by the
results of the UK referendum. Such a divide may undermine the core bond that
characterizes the collective decision-making process when both groups of
countries are involved in the same decision-making process.
122
Hastings Int’l & Comp. L. Rev.
***
[Vol. 40:1
Ch
he
China-Gulf Cooperation Council Free
Trade Agreement
GONZALO VILLALTA PUIG AND ALICE TUNG HO YEE
Abstract
The free trade agreement between China and the Gulf Cooperation
Council (GCC) currently under negotiation is due to become China’s first
comprehensive trade and investment agreement with a supranational
customs union. The article explores the challenges and opportunities of the
proposed China-GCC Free Trade Agreement. It proposes tailor-made
recommendations according to the specific interests of both parties.
I.
Introduction
The Gulf Cooperation Council (GCC) comprises Saudi Arabia,
Kuwait, Oman, Bahrain, Qatar and the United Arab Emirates (UAE). China
and the GCC countries are WTO Members and thus are parties to WTO
agreements such as the General Agreement on Trade in Services (GATS)
and the General Agreement on Tariffs and Trade (GATT). Moreover,
China has embraced the significance of bilateral Free Trade Agreements
(FTAs) to continuous growth.1 China’s past FTAs are mainly signed with
 Gonzalo Villalta Puig is Head of the School of Law and Politics, Professor of Law and
Chair of the Constitutional Law of Economic Integration at The University of Hull. He is an
Overseas Fellow of the Australian Academy of Law and a Fellow of the European Law
Institute. Prof Villalta Puig is chair of the Research Group for Constitutional Studies of Free
Trade and Political Economy of the International Association of Constitutional Law and a
member of the Study Group on Preferential Trade and Investment Agreements of the
International Law Association. He is a member of the Full Council of the International Law
Association. Prof Villalta Puig is Associate Editor of the Global Journal of Comparative
Law (Brill Nijhoff). He is an Outstanding Fellow of the Faculty of Law, The Chinese
University of Hong Kong.
1. John Whalley et al., China’s Regional and Bilateral Trade Agreements, (Institute of
World Economics and Politics, Working Paper No. 201408, 2014), http://eniwep
.cssn.cn/webpic/web/eniwep/upload/2014/04/d20140410153552466.pdf.
123
124
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
small economies, showing “big country morality”2 by entering into FTAs
to help smaller nations but not to reap the benefits of large trade volumes.
On the other hand, the GCC has signed FTAs with Singapore in 2008 and
with the European Free Trade Association (Iceland, Liechtenstein, Norway,
Switzerland) (EFTA) in 2009.
This article makes recommendations for a proposed free trade
agreement (the proposed FTA) between China and the GCC (Parties) under
negotiation, a process formally launched in 2004.3 It aims to address
critical issues during Sino-GCC negotiations, thereby analyzing the
prospects and challenges of the proposed FTA, especially in services and
investment. It can serve as prelude to a wider GCC-ASEAN FTA.4 It has
three parts. Part One analyzes the political economy and security
considerations that help to understand the needs of the Parties. Part Two
examines the trade interdependence between the Parties and the negotiation
progress. Part Three analyzes the key issues of the proposed FTA and
makes recommendations. The article concludes that capacity building
should be the predominant objective of the proposed FTA.
II. Political Economy and Security Considerations
China’s political system is dominated by the Communist Party of
China (CPC) without judicial checks. For the CPC, law is only a means of
governance. Thus, rule of law is weak in China. It values collective
prosperity rather than human rights.5
On the other hand, the GCC was formed in 1981 for external security
purposes. Its members are energy-rich monarchies that share mutual political
and security interests. The society is highly hierarchical.6 Human rights
have been disregarded by the various GCC governments.7
2. Zha Daojiong, China’s Economic Diplomacy Focusing on the Asia-Pacific Region, 1(1)
CHINA QUARTERLY OF INTERNATIONAL STRATEGIC STUDIES 85, 85-104 (2015).
3. JORGE MONGAY, BUSINESS AND INVESTMENTS IN ASIA: NEW CHALLENGES, NEW
OPPORTUNITIES, 193 (ESIC Editorial, 1st ed. 2012).
4. Nasser H Saidi, The Gulf Should Pivot East and Build the ‘New Silk Road’, THE
HUFFINGTON POST Apr. 15, 2014 (last updated June 15, 2014), http://www.huffington
post.com/dr-nasser-h-saidi/the-gulf-should-pivot-eas_b_5010038.html.
5. Olivia Enos, Why China’s Human Rights Violation Do Matter, daily signal, Sept. 23,
2015, http://dailysignal.com/2015/09/23/why-chinas-human-rights-violations-do-matter/
6. TAREQ Y. ISMAEL, M IDDLE EAST P OLITICS TODAY : GOVERNMENT AND CIVIL
S OCIETY 339 (2001).
7. Jennifer Fenton, “Significant Ramping” of Political Repression in the Gulf, Activists
Warn, ALJAZEERA AM., Apr. 15, 2015, http://america.aljazeera.com/articles/2015/4/15/bahrainhuman-rights-gcc-monarchies.html.
2017]
Challenges and Opportunities GCC
125
The rapid growth in oil production enables the rulers of the GCC
countries to entrench their authority. Citizens rely on oil revenue to achieve a
higher rank in social hierarchy.8 Thus, the GCC governments depend on oil
production to prevent dissent apart from external security.
Concerning foreign policy, China has adopted a non-interventionist
policy and did not compete with the United States to protect the Gulf’s
stability before the 9/11 terrorist attack. Besides, the 1991 Gulf War made
China’s approach to insulate itself from the Gulf impossible.9 The crisis in
Libya and Sudan in 2011 and the Iran nuclear deal in 2015 prompted China
towards a more balanced approach towards the GCC countries.10 Since
2008, China has been discovering key national interests in the GCC.11 It
seeks to safeguard its assets and citizens in the Gulf. China has changed its
diplomatic strategy towards the GCC from non-intervention to active
pragmatism.12
Meanwhile, the GCC has placed vital importance on security.
Notably, political challenges caused by the Iran-Iraq War highlight the
significance of political commitment for enhancing integration of the
GCC.13 Political events like the Arab Spring and the 9/11 attack have
stimulated the GCC countries to handle their affairs free from US and
European Union interference.14 Regarding China as a constructive force to
enhance its stability,15 the GCC has pursued the “looking east policy” to
seek opportunities for strategic partnership with China.16
Notably, the Parties share a strong interest in safeguarding domestic
stability.17 As China highly depends on oil imports from the GCC, it seeks to
8. Ismael, supra note 7 at 341.
9. See John Calabrese, China and the Persian Gulf: Energy and Security, 52 MIDDLE EAST
J. 351, 366 (1998).
10. Lars Erslev Andersen & Yang Jiang, Oil, Security, and Politics: Is China Challenging
the US in the Persian Gulf?, 29 DANISH INST. FOR INT’L STUD. 1, 6 (2014).
11. Wu Bingbing et al., China and the Persian Gulf: Implications for the United States,
WOODROW WILSON INT’L CTR. FOR SCHOLARS 1, 10 (2011), https://www.wilsoncenter.org/sites/
default/files/ASIA%20Program_China%20and%20the%20PG.pdf.
12. Andersen & Jiang, supra note 11 at 6.
13. Gonzalo Villalta Puig & Amer Al-Khodiry, The Economic and Monetary Union of
the Gulf Cooperation Council, 46 J. OF WORLD TRADE 121, 140-41 (2012).
14. Andersen & Jiang, supra note 11 at 5.
15. Chen Mo, Exploring Economic Relations Between China and the GCC States, 5(4)
J. OF MIDDLE EASTERN & ISLAMIC STUDIES. 88, 102 (2011).
16. Andersen & Jiang , supra note 11 at 41.
17. Jon B. Alterman, China’s Balancing Act in the Gulf, CTR. FOR STRATEGIC & INT’L
STUDIES, 3 (2013).
126
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
ensure the stability of energy relations.18 Meanwhile, the GCC hopes to
safeguard its energy reserves. Thus, it shields Chinese interests in the Middle
East from threats19 to the security of shipping links. Moreover, the Parties
have to work together to safeguard the sea lanes emerging from China’s
One Belt One Road (OBOR) initiative.
Sino-GCC disagreement over global responses to the Syrian conflict
hampered their negotiations in 2009.20 Nonetheless, both sides agreed to
facilitate political settlement on the Syrian disagreement in 2014 and even
expressed the urgency of peaceful political settlement of Syria in 2016.21
Both sides oppose terrorism. This common approach favors their
cooperation toward security in the context of a wider strategic partnership.
As for economic policy, China pursues “going-out” strategies and
regards service as the priority.22 China promotes “supply-side structural
reform”,23 which includes technological innovation and infrastructure.
Notably, Xi launched the OBOR initiative in 2015.24 It aims to link China to
Europe and the Middle East.25
The GCC members have committed to integrate their economies since
the establishment of the GCC. The GCC became a Custom Union in 2003.26 Its
common market status was declared in 2008 and has long aspired for the
establishment of single GCC currency.27 Yet, its economic integration remains
difficult because of its structural weaknesses, persistent obstacles to cross-border
18. Mike Burnham, Georgetown Security Studies Review: China in the Middle East, GEO.
U. CTR. FOR SECURITY STUD. (2015), http://georgetownsecuritystudiesreview.org/wp-content/
uploads/2015/07/GSSR-Asia-Conference.pdf.
19. Id.
20. Adel Al Toraifi, Chinese Foreign Minister: Our position on Syria is objective
ASHARQ AL AWSAT (2014), http://english.aawsat.com/2014/03/article55330119/ chinese-foreignminister-our-position-on-syria-is-objective-and-fair.
21. Saudi Arabia, China issue joint communiqué on establishing comprehensive strategic
partnership between the two countries, ALYAMAMH, (Mar. 19, 2016),http://www.alriyadh.com
/en/article/1121322/Saudi-Arabia-China-issue-joint-communiqu-on-establishing-comprehensivestrategic-partnership-between-the-two-countries.
22. China – Minutes of the Meeting, ¶ 1.7., WTO Doc. WT/TPR/M/300 (Aug. 26, 2014)
[Hereinafter China Meeting Minutes].
23. China’s ‘supply-side structural reform’ to boost new economy’, CHINA DAILY, Dec. 31,
2015, http://europe.chinadaily.com.cn/business/2015-12/31/content_22885281.htm.
24. Wu Sike, Constructing “One Belt and One Road” and Enhancing the China-GCC
Cooperation, 9(2) J. OF MIDDLE EASTERN & ISLAMIC STUD., 1, 1-15 (2015).
25. Id.
26. Theodore Karasik, The GCC’s New Affair with China, MIDDLE EAST INST. (2016),
http://www.mei.edu/content/map/gcc%E2%80%99s-new-affair-china.
27. Ali Al-Abdulrazzaq & Kevin Carey, Economic Integration in the GCC, THE WORLD
BANK (2010), http://siteresources.worldbank.org/INTMENA/Resources/GCC Studyweb.pdf.
2017]
Challenges and Opportunities GCC
127
mobility within the GCC and different regulatory frameworks.28
While the GCC heavily relies on oil revenue, oil is exhaustible.29 To
cope with uncertainties in the international oil market, the GCC countries
promote privatization and utilize oil revenue for economic diversification.
They are also invest more in manufacturing and services.30 As the
technological and managerial intelligence of Chinese financial firms have
become increasingly competitive, their penetration into GCC markets
would stimulate the diversification of the GCC economies’ from energy
production to services.31 Yet, most private sector jobs are still filled by
foreign workers.32 Thus, diversification in the GCC still faces obstacles
such as the failure to generate significant job opportunities for nationals.
III. Origins and Development
To bolster economic growth, China is interested in deepening trade
and investment ties with the GCC.33 It perceives the GCC as a paramount
partner, especially in energy.34 China is predicted to become the largest
exporter to the GCC by 2020.35
In regards to the OBOR initiative, Saudi Arabia has expressed its
willingness to participate in establishing interconnectivity in the GCC as it
stands at a crucial junction along OBOR routes.36 The GCC views the OBOR
as a natural partner that promotes mutual benefits by its deeper investment in
China including renewable energy, infrastructure, aviation, finance and
telecommunications.37 These opportunities would be enticements for both
sides to support OBOR and favor the conclusion of the proposed FTA.
28. Ali Al-Abdulrazzaq & Kevin Carey, supra at note 27.
29. Tim Callen & Reda Cherif, Economic Diversification in the GCC: Past, Present, and
Future, IMF STAFF DISCUSSION NOTE (2014), https://www.imf.org/external/pubs/ft/sdn/2
014/sdn1412.pdf.
30. Michael Thorpe & Sumit Mitra, Growing Economic Interdependence of China and the
Gulf Cooperation Council, SOC. SCI. RESEARCH NETWORK (2008).
31. Mo, supra note 15.
32. Callen & Cherif, supra note 29.
33. Matteo Legrezi & Fred H. Lawson, China’s Gulf Policy: Existing Theories, New
Perspectives, 22 (2) MIDDLE EAST POLICY 58, 58-71 (2015).
34. Wu, supra note 24.
35. Robert Bailey, China and GCC: Growing Ties, GULF BUSINESS, Apr. 16, 2013,
http://www.gulfbusiness.com/articles/insights/china-and-gcc-growing-ties/.
36. GCC and China Decide to Speed up Free Trade Talks, SAUDI GAZETTE, Jan. 21, 2016,
http://saudigazette.com.sa/saudi-arabia/gcc-and-china-decide-to-speed-up-free-trade-talks/.
37. Id.
128
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
The Parties began negotiations in 2004. Both sides started to
negotiate service trades after agreeing in principle to trade in goods in 2009
but the talks halted in the same year. The Saudi Crown Prince visited
Beijing in March 2014.38 Sino-GCC negotiations for the FTA resumed in
December 2015.39 Subsequently, Xi met with Saudi Arabia’s Deputy
Crown, Prince Mohammed bin Salmon on January 19, 2016. They have
agreed to expedite progress to conclude a comprehensive FTA by the end
of 2016.40 Meanwhile, the two sides agreed to elevate their ties to a
strategic partnership.41 The sixth round of China-GCC official negotiation
was held in Riyadh, Saudi Arabia from February 29 to March 3, 2016.42
Subsequently, the Parties held the seventh round of negotiations in Guangzhou
from May 8 to 10, 2016.43 They have achieved positive progress in issues such
as trade in services, investment and technological cooperation.44
Unlike China’s past FTAs, the major driving force of this agreement is
the significant energy trade between the Parties. Consider the Parties’ FTAs.
The China-Australia FTA (“ChAFTA”) is China’s first comprehensive FTA
signed with a strong developed country in the west, making most achievements
in service and investment liberalization.45 The GCC-Singapore FTA
(“GSFTA”) is the first FTA signed by the GCC with an Asian country.46 It has
38. ZHA DAOJIONG & MICHAEL MEIDAN, CHINA AND THE MIDDLE EAST IN A NEW
ENERGY LANDSCAPE, 9 (Royal Institute of International Affairs, 2015), https://www.chath
amhouse.org/sites/files/chathamhouse/publications/research/20151021ChinaMiddleEastEnr
gyDaojiongMeidan.pdf.
39. China, GCC Vow to Reach Comprehensive FTA within 2016, MINISTRY OF
COMMERCE, PRC (Jan, 28, 2016), http://fta.mofcom.gov.cn/enarticle/engcc/engccnews
/201601/30498_1.html.
40. Bailey, supra note 35.
41. China, Saudi Arabia Elevate Bilateral Ties, Eye More Industrial Capacity
Cooperation, XINHUA, Jan. 20, 2016, http://news.xinhuanet.com/english/2016-01/20/c_
135025406.htm.
42. The 6th Round of China - GCC FTA Negotiations Held in Riyadh, Saudi Arabia, MINISTRY
OF COMMERCE, PRC (Mar. 10, 2016), http://fta.mofcom.gov.cn/enarticle /engcc/engccnews/201603/30
938_1.html.
43. Id.
44. The 7th Round of China - GCC FTA Negotiation Concluded, MINISTRY OF COMMERCE, PRC
(May 12, 2016), http://english.mofcom.gov.cn/article/newsrelease/significantnews/201605/2016
0501316237.shtml.
45. Interpretation for China - Australia Free Trade Agreement, MINISTRY OF COMMERCE, PRC
(June 19, 2015), http://english.mofcom.gov.cn/article/policyrelease/Cocoon/ 201510/20151 00
1144954.shtml, [hereinafter Interpretation for China-Australia Free Trade Agreement].
46. Kevin Körner, The GCC Going East, DEUTSCHE BANK, Feb. 18, 2014, at 4,
https://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD00000000003296
87/The+GCC+going+East%253A+Economic+ties+with+developing+Asia+on+the+rise.pdf.
2017]
Challenges and Opportunities GCC
129
been asserted that the proposed FTA would build upon the GSFTA.47
China considered its past FTAs as learning lessons for potential FTAs
with sequential trading partners.48 Yet, the Chinese approach to FTAs is not to
adopt a template for all, but customize a negotiating strategy according to the
interests of the trading partners.49 For instance, the China-ASEAN agreement
emphasizes broad commitments of developmental cooperation, not precise
commitments. In contrast, the China-New Zealand FTA (“NZCFTA”) favors
more precise commitments than developmental cooperation.
In addition, it would be rewarding to draw insights from innovative
provisions from successful FTAs worldwide,50 notably the Canada-EU
Comprehensive Economic and Trade Agreement (“CETA”). CETA has been
praised for prescribing a ‘new gold standard’ for international FTAs.51 Hence,
selected WTO-plus innovations in the ChAFTA, GSFTA and CETA will be
referred to in this article.
IV. Challenges and Opportunities
A.
Experience from the Failure of EU – GCC FTA
Negotiations
FTA negotiations between the EU and the GCC stalled for a number of
reasons. The first hindrance to EU-GCC FTA negotiations was disagreement
over human rights and democratic processes.52 The European Parliament
insisted on imposing a human rights clause which the GCC countries53
perceived as a political condition to any final agreement.54 Secondly, the
GCC countries hoped to gain technical assistance for their deepening
47. Saidi, supra note 4.
48. Whalley, supra note 1 at 9.
49. Id. at 10-11.
50. Christina L. Davis, The Political Logic of Dispute Settlement: Introduction to the Special
Issue, 15(2) THE REV. OF INT’L ORG. 12 (2015), replicated at https://www.princeton.edu/~cldavis
/files/ROIO_DavisIntro.pdf.
51. Constantine Passaris, CETA - Greece’s Saviour?, OPENCANADA.ORG, Dec. 2, 2014,
https://www.opencanada.org/features/ceta-greeces-saviour/.
52. Id.
53. M. Anaam Hashmi, Is There A Need for A Free Trade Agreement between the European
Union and Gulf Cooperation Council?, 13(1) INTERNATIONAL BUSINESS & ECONOMICS
RESEARCH JOURNAL 113, 113-120 (2014).
54. Kristian Coates Ulrichsen, THE GULF STATES IN INTERNATIONAL POLITICAL ECONOMY
(International Political Economy Series, 1st ed. 2015).
130
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
regional integration.55 Yet the EU made limited contributions to integrate the
GCC into global markets.56 Institutional differences and conflicting cultural
values further hindered the progress of EU-GCC negotiations.57 Thirdly, the
GCC was unhappy with the EU’s high tariffs on petrochemical exports.58 The
EU claimed that the high level of tariffs was justified by the subsidies received
by Gulf producers. Building the relationship upon the reasons for these various
disagreements is the key to any eventual resumption of FTA talks.59
Unlike EU-GCC FTA negotiations, the Parties would not face the same
deadlock as to human rights clause because they do not show much concern
for these considerations. Besides, Sino-GCC negotiations are unlikely to be
hindered by conflicting values. Both Parties have appreciated the significance
of people-to-people exchanges to deepen cooperation.60 The OBOR initiative
would add substance to people-to-people cooperation by facilitating cultural
exchanges. Besides, Chinese Confucianism respects diversity.
While
conflicting cultural values are unlikely to be a setback as in EU-GCC
negotiations, China needs to recognize Islamic cultural exceptions.
Nonetheless, the major challenge to the proposed FTA concerns the
Chinese’s determination to restrict access of GCC petrochemical exporters to
its markets. The GCC suspects China desires to shield domestic producers
from international competition.61 Thus, current negotiations with China seem
to resemble talks with the EU regarding petrochemical issues. This difficulty
may imply the need for China to make concessions so as not to protect
domestic producers persistently.
B. Trade in Goods
The Parties “substantially concluded in principle the negotiations on
trade in goods” in January 2016. Both sides had actually agreed on the
market access of 97 percent of goods in 2009. According to World Tariff
Profile 2015, China’s simple average Most Favoured Nation (MFN) tariff
55. Rym Ayadi, Relations between EU & Gulf Cooperation Council (GCC) Countries,
EUROPEAN PARLIAMENT at 17 & 21 (Oct. 25, 2010), http://www.europarl.europa
.eu/RegData/etudes/note/join/2010/433742/EXPO-AFET_NT(2010)433742_EN.pdf.
56. Hashmi, supra note 53.
57. Valentina Kostadinova, What is the Status of the EU - GCC Relationship?, GULF
RESEARCH CENTER, at 3-4, 10 (2013), https://www.files.ethz.ch/isn/167338/EU-GCC_9227.pdf
58. Ayadi, supra note 55.
59. Kostadinova, supra note 57, at 3.
60. China, GCC Agree to Accelerate FTA Negotiations, NEWS OF THE COMMUNIST PARTY OF
CHINA, Jan. 16, 2016, http://english.cpc.people.com.cn/66102/7706041.html.
61. Ulrichsen, supra note 54.
2017]
Challenges and Opportunities GCC
131
rate was 9.6% in 2014. The average tariff for agricultural products is
15.2% while the average tariff for nonagricultural products is 8.6% in
2014. On the other hand, the simple average MFN tariff rates in 2014 for
the main GCC member, Saudi Arabia, is 5.1%. Its average tariff for
agricultural and non-agricultural products are 5.9% and 5% respectively.
In the same year, the other two main GCC members, Qatar and the UAE,
have simple average MFN tariff rates of 4.7%. Qatar has an average tariff
of 5.3% for agricultural products while the UAE is 5.4%. The average for
non-agricultural products is commonly 4.6%. Thus, China has higher
simple average tariff rates than those of GCC countries. In particular,
China’s higher tariff rate for agricultural products shows higher protection
of its domestic production of agricultural products.
To be WTO-compatible, GATT Article XXIV:8 provides for the
elimination of ‘duties and other restrictive regulations’ with respect to
‘substantially all the trade’ between the parties. Quantitatively, the standard
requires 90% of tariffs to be removed.62 Considering the tariff elimination
schedules of past FTAs, over 85% of Australia’s exports entered China
duty free when ChAFTA came into force and an additional 8% upon full
implementation. GSFTA eliminated tariffs on 93.3% of goods of
Singaporean origin when it came into force while an additional 2.7% will
phase out after a five-year transitional period. Hence, the Parties’ past
FTAs generally meet the benchmark of 90% and support the approach of
eliminating most of the tariffs immediately at date of entry into force, leaving a
small percentage to gradually phase out after a specified transitional period.
Generally, the Parties impose low tariff rates for non-agricultural
products. While the GCC countries rely on Chinese imports for industrial
products,63 China imports metals from the GCC.64 Notably, the UAE has
exported a significant amount of aluminum to China, thus it has called for
the elimination of tariffs on aluminum.65 Meanwhile, China’s chemical
market has experienced double-digit growth since 2013.66 This growth
62. Proposal for a COUNCIL DECISION on the conclusion of an Association Agreement
between the European Community and its Member States of the one part, and the Republic of
Chile, of the other part, EUR-LEX Document 52002PC0536(02) ¶ 6 (2002).
63. Mo, supra note 15.
64. Assessing Investment Policies of Member Countries of the Gulf Cooperation Council,
MENA - OECD Investment Programme, at 12, presented on Apr. 5, 2011, http://www.
oecd.org/mena/competitiveness/Preliminary%20assessment%20GCC%20invt%20policies.pdf.
65. Trade Policy Review United Arab Emirates Record of the Meeting, WTO Doc
WT/TPR/M/262, ¶ 156, (May 9, 2012) [hereinafter United Arab Emirates Trade Policy Review].
66. Tahir Ikram, GPCA’14: GCC Eyes More PE, PP Exports to China on Capacity Growth,
ICIS (Nov. 24, 2014), http://www.icis.com/resources/news/2014/11/24/9841128/gpca-14-gcceyes-more-pe-pp-exports-to-china-on-capacity-growth/.
132
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
boosts Chinese demand for plastic, a demand that can be largely satisfied
by the GCC. These mutual benefits present opportunities for proactive
market access commitments in relation to manufactured products,
especially chemicals. Nonetheless, other considerations, such as maturity
of industry, would justify the inclusion of short transitional periods for
ultimate tariff elimination.
The GCC has unilaterally stalled negotiations with China, as the GCC
wanted China to eliminate import tariffs on all its products whereas China
insisted on keeping the preset protective tariffs of GCC’s petrochemical
exports to China.67 Despite detriment to domestic producers, it would be
WTO-compatible for both sides to agree on a partial tariff elimination in
order to stimulate final agreement. China’s high dependence on the GCC’s
oil resources for energy security68 would justify the need for China to make
a compromise during negotiations. Yet, the transitional period for tariffs
on petrochemicals to phase out should be longer on two grounds. First, the
GCC’s strong competitiveness in the area of petrochemical products calls
for partial competitive pressures on China’s petrochemical industry. The
second reason concerns the political aspect. As both sides have expressed a
willingness to establish a strategic partnership and conclude the FTA by the
end of 2016,69 this implies that the proposed FTA neither serves to achieve
domestic policy reform nor achieve development goals. Its objective is to
deepen the bilateral relationship in various sectors. Therefore, the scope and
the speed of liberalization is less ambitious.
Petrochemicals aside, the highly sensitive agricultural sector also calls for a
moderate elimination model comprising a longer transitional period for tariffs to
phase out. It would be overly ambitious to agree on full liberalization of
agricultural exports. This is consistent with ChAFTA, where the transitional
period for different agricultural products ranges from seven to nine years.
C. Rules of Origin
There are four methods to assess whether a product is substantially
transformed to confer origin. They are the change in tariff classification
rule (CTCR), the value-added rule (VAR), hybrid rule and specified
process rule (SPR).
Considering China’s past FTAs, ChAFTA applies product specific
67. Stasa Salacanin, GCC - China Rising Trade Value, BQ MAGAZINE, Mar. 23, 2014,
http://www.bq-magazine.com/economy/2014/03/gcc-china-rising-trade-value.
68. Mo, supra note 15.
69. Bailey, supra note 35.
2017]
Challenges and Opportunities GCC
133
rules (PSR) to products produced in China that contains non-originating
materials. The PSR adopts three main methods to confer origin to nonoriginating materials such as the CTCR, VAR and SPR. The CTCR is also
adopted as the main rule in NZCFTA, which was signed in 2008.70 The
China-Korea FTA (ChKFTA) signed in 2004 shares the same approach as
ChAFTA with some exceptions that permit a VAR of 40%.71 As for the
China-Singapore FTA (CSFTA), signed in 2008, the VAR is also the major
means to confer origin and the minimum percentage is 40%.72 It seems that
the approach in Chinese FTAs is basically straightforward. They either rely
on the CTCR or VAR to confer origin. However, the recent trend of
Chinese FTAs seems to favour the CTCR as the main rule with the VAR as
a supplement for some products. The dominance of the CTCR in Chinese
FTAs also shows China’s preference for simplicity. The CTCR is satisfied
by the determination of a classification code. The CTCR has been hailed
for its predictability and clarity in application.73
On the GCC’s side, GSFTA requires at least 35% VAR of the exworks price to qualify for preferential treatment. It also adopts the PSR for
10 products, where the origin is assessed by a CTCR. The GCC’s FTA
with EFTA is mainly based on the European model but with less restrictive
rules to chemical products.74 Therefore, it seems that the Rules of Origin
(ROOs) of the GCC’s past FTAs are more complicated and they vary with
the choice of partners to the FTA. For instance, both CSFTA and GSFTA
adopt VAR as the major criteria. This supports the proposition that Singapore
prefers VAR as the main criteria to confer origin. Hence, Singapore’s
preference had a heavy influence on the decision to use VAR as the dominant
rule in GSFTA.
In the light of recent FTA trends, the proposed FTA should adopt
CTCR as the main criterion with the exception of VAR for some products,
70. New Zealand–China Free Trade Agreement: Information about Rules of Origin Import, NEW ZEALAND CUSTOMS SERVICE, at 1 (Nov., 2008), http://www.customs.govt.nz/
news/resources/factsheets/documents/fact%20sheet%2037.pdf.
71. Jeffrey J. Schott, An Assessment of the Korea-China Free Trade Agreement,
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS (2015), (Noting that RVC is
analogous to the value-added-rule), https://www.piie.com/publications/pb/pb15-24.pdf.
72. Benefits of FTA between Singapore and China, BRYAN CAVE INTERNATIONAL
CONSULTING (2013), http://www.iesingapore.gov.sg/~/media/IE%20Singapore/Files/Events
/iAdvisory%20Series/China%202013/420Benefits20of20FTA20between20Singapore20and
20ChinaBryan20Cave.pdf.
73. Erlinda M. & Jenny Balboa, ASEAN Rules of Origin: Lessons and
Recommendations for Best Practice, ERIA DISCUSSION PAPER, at 6 (2009), https://core.ac.uk
/download/files/153/9306182.pdf.
74. EFTA and GCC, EFTA-GCC Free Trade Agreement, June 22, 2009.
134
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
as the GCC is likely to draw reference from its past FTAs and embrace the
approach favored by China. Adopting co-equal rules where the CTCR and
VAR are used together would offer flexibility and reduce costs, thereby
boosting liberalization.75
Furthermore, ROOs may serve as a tool to enhance the foreign policy
interests of a country.76 Increasing ROOs’ restrictiveness motivates
domestic producers to adopt factors of production originating in the territories
of the FTA partner. The international trade literature has recorded many cases
of devising ROOs as a means of domestic protectionism.77 Besides, ROOs
have been recognized as protectionist barriers.78 Therefore, it would be
necessary to pay attention to the sensitive products that are protected by the
protectionist measures of either party.
The restrictiveness of ROOs tends to increase disproportionately to
prevent trade deflection.79
Two types of goods merit deserves
consideration in the light of their ROOs’ restrictiveness because of
increased worldwide competition. First, in order to protect Chinese
agricultural exports against foreign competition, particularly from India,80
more restrictive ROOs would be necessary for agricultural products.
However, some agricultural products can be ingredients for the processed
food of the GCC countries. The ROOs for processed food from the GCC
should not be set too high because processing often requires inputs such as
capital intensive infrastructures, involving much mechanization. If their
ROOs are set very high, the GCC exporters would face high compliance
cost due to their use of capital intensive inputs that cannot be produced
competitively in China. As their processed goods usually require
processing in third countries before they are ready for export, they tend to
become ineligible for preferential access. Hence, technical content –
especially the proportion of capital intensive inputs in a good – would be a
crucial consideration for the restrictiveness of ROOs. It is necessary to
75. Erlinda & Balboa, supra note 73.
76. Moshel Hirsch, The Politics of Rules of Origin, HEBREW UNIVERSITY OF JERUSALEM
(June 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2275322.
77. Kerry A. Chasl, Protecting Free Trade – Political Economy of Rules of Origin, 62
INT’L ORG. 507 at 507-530 (2008).
78. Dokki Abdallah El-Kateb St., Free Trade Agreements and Rules of Origin, INTL’S CTR
FOR ECON. GROWTH at 2 (2015), http://www.atdforum.org/IMG/pdf/Policy_Brief_RoO.pdf.
79. Paul Brenton, Enhancing Trade Preferences for LDCs: Reducing the Restrictiveness of
Rules of Origin, THE WORLD BANK, at 281 (2005), http://siteresources.worldbank.org/INTRANE
TTRADE/Resources/239054-1126812419270/23.RulesOfOrigin.pdf.
80. Levin Flake, India’s Agricultural Exports Climb to Record High, UNITED STATES
DEPARTMENT OF AGRICULTURE FOREIGN AGRICULTURAL SERVICE (Aug., 2014),
http://www.fas.usda.gov/data/india-s-agricultural-exports-climb-record-high.
2017]
Challenges and Opportunities GCC
135
obtain information regarding the various production processes in order to
analyze the technical content of different goods. This would call for a
specific cooperative framework for consultations and modifications.
GSFTA Article 3.15 would serve as a good reference for this point.
Secondly, clothing and textile generally come under protectionism
because they can be produced with low-skilled labor.81 China is labor rich.
Because of low labor cost, Chinese garments are major exports to GCC
countries.82 However, stringent ROOs might restrain the GCC nations from
reaping the full benefit of preferential measures, thereby counteracting trade
liberation. Notably, research shows that applying restrictive ROOs to
garments is not an effective means to protect domestic industry.83 It should be
noted that Chinese producers have recently increased their use of imported
fabric, especially from Japan and Taiwan.84 Meanwhile, Korean apparel has
become increasingly popular. It would be worthwhile to consider the ROOs
adopted by ChKFTA for textile and apparel which qualify exporters who
satisfy either a CTCR or a 40% VAR threshold for preferential treatment. This
would be preferred to a yarn forward rule where these exports would qualify
for preference only if they are made of yarn or fabric from either party.
More importantly, inclusion of cumulation and de minimis rules are
indispensable, as they help lessen the negative trade effects of restrictive
ROOs. Also, as certification procedure has a direct implication on compliance
cost,85 it would be worthwhile for the Parties to adopt a self-certification
process that can reduce administrative costs to exporters by passing the burden
of proof of origin to importers.
D. Safety Standards
As China and the GCC countries are WTO members, they need to
comply with the Agreement on the Application of Sanitary and
Phytosanitary Measures (“SPS Agreement”)86 and the Agreement on
Gary Banks, Rules of Origin under Australia - New Zealand Closer Economic Relations
Trade Agreement, 37, AUSTRA. GOV’T PRODUCTIVITY COMM’N RESEARCH REPORT (2004),
http://www.pc.gov.au/inquiries/completed/trans-tasman-trade-agreement/report/roo.pdf.
82. FTA Talks Reach across the Gulf, CHINA DAILY (Dec. 30, 2014), http://www.china.
org.cn/business/2014-12/30/content_34440629.htm.
83. Erlinda & Balboa, supra note 73.
84. Textile and Apparel Market in China, EU SME CENTRE, 12-13 (2011),
http://www.ccilc.pt/sites/default/files/eu_sme_centre_report_-_textile_and_apparel_market_
in_china_sep_2011.pdf.
85. Erlinda & Balboa, supra note 73.
86. Agreement on the Application of Sanitary and Phytosanitary Measures, Apr. 15,
136
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Technical Barriers to Trade (“TBT Agreement”).87 The SPS Agreement
entails pertinent laws, regulations and requirements for safeguarding health
within the territory of a WTO member from predefined specific risks of
health. The TBT Agreement requires technical regulations and conformity
assessment procedures that protect health to avoid discrimination and
unnecessary barriers to trade, while adhering to the international standards.
They can be used to meet broader objectives than the SPS Agreement.
Therefore, the issues concerning these two agreements would be
considered together in turn. It is important to balance the need of improved
market access by streamlining import control procedures with the
legitimate objectives that justify the restriction of trade.88
The first priority issue arises from the food crisis in China and the
reliance of GCC countries on food imports. The Chinese authorities have
adopted a food security strategy to strive for dominance in the worldwide
supply chain for imported food despite its diminished exports recently. 89
Meanwhile, the GCC countries depend mainly on food imports and at least
one fifth of the population in the GCC countries are expected to face food
insecurity by 2020.90 Their food producers would experience stronger
growth through processed foods made by imported ingredients.91 In particular,
Saudi Arabia has recently reiterated the vital importance of food security as it
is a net wheat importer.92 These favour an opportunity of mutual trade where
China exports grains to the GCC in return for processed food.
Nonetheless, China’s recent food safety scandals such as contaminated
meat products in 2014 and pork from diseased pigs in 201593 would merit
specific consideration during negotiations of the SPS and TBT chapter.
1994 (entered into force Jan 1, 1995), [hereinafter “SPS Agreement.”]
87. Agreement on Technical Barriers to Trade, Apr. 15, 1994 (entered into force
January 1, 1995), [hereinafter TBT Agreement].
88. TBT Agreemen, supra note 87 at art. 2.2.
89. Fred Gale, China’s Growing Demand for Agricultural Imports, 19 U.S.D.A. (Feb.
2015), available at http://www.ers.usda.gov/media/1784488/eib136.pdf.
90. Houcine Boughanmi, Food and Agricultural Trade in the GCC: An Opportunity for
South Asia?, 4, UN ESCAP (2014)， http://www.unescap.org/sites/default/files/Food%20an
d%20Agricultural%20Trade%20in%20the%20GCC_Jeevika_Sept2014.pdf.
91. Food International, GCC Food Retail Will be Worth $155 Billion by 2018,
GULFOOD (2015), http://www.gulfood.com/Content/GCC-food-retail-will-be-worth-155billion-by-2018.
92. Trade Policy Review Report by the Kingdom of Saudi Arabia, WTO Doc
WT/TPR/G/333 (adopted Feb. 29, 2016), [hereinafter Saudi Arabia Trade Policy Review].
93. Chinese Police Arrest More Than 100 People for Selling Contaminated Pork,
FOOD SAFETY NEWS (Jan. 12, 2015), http://www.foodsafetynews.com/2015/01/chinesepolice-arrest-over-100-for-selling-contaminated-pork-products/#.VtO66px96Ul.
2017]
Challenges and Opportunities GCC
137
The Parties should strike a balance between the importance of market
access and food safety.
Both sides face huge regulatory obstacles concerning the risk
assessment and import checks for imported food. China has intensified its
commitments to boost its existing food safety law, notably China’s Food
Safety Law, which became effective in October 2015.94 The State Food
and Drug Administration regularly formulates laws and regulations to
monitor food safety in general.95 Therefore, processed food imports from
the GCC countries need to satisfy these standards before entering into
China. On the other hand, Chinese grain exports have to satisfy the food
control procedures of the GCC based on GCC Guide for Control on
Imported Foods (GCC Guide)96 and the standards issued by the GCC
Standards Organization (GCCSO).97
Regarding the SPS chapter, Chinese FTAs are mainly modeled on the
SPS Agreement. ChAFTA basically restates WTO principles while
proposing requirements about transparency and the objective of mutual
understanding. The only exception seems to be NZCFTA, which
encompasses aspects regarding the implementation arrangements of SPS
including risk analysis,98 criteria for determination of equivalence99 and
verification100 as well as cooperation in respect of technical assistance.101 It
also prescribes the obligation of timely notification regarding significant
health issues and scientific findings of diseases.102 Likewise, the SPS
chapter of the GCC’s past FTAs is based on the SPS Agreement. Notably,
GSFTA explicitly expresses the objective to “facilitate technical
94. Jennifer Clever, Food and Agricultural Import Regulations and Standards –
Narrative FAIRS Country Report, 4, USDA Foreign Agricultural Service (Dec. 30, 2015),
http://agriexchange.apeda.gov.in/IR_Standards/Import_Regulation/Food%20and%20Agricu
ltural%20Import%20Regulations%20and%20Standards%20%20NarrativeBeijingChina%20
%20Peoples%20Republic%20of12302015.pdf.
95. World Trade Organization, Trade Policy Review Report by the Secretariat China,
WTO Doc WT/TPR/S/300 ¶ 3.78 (2014).
96. GCC Guide for Control on Imported Foods, THE GCC AGRICULTURE & FISHERIES
RESOURCES DIRECTORATE (2015), http://sites.gcc-sg.org/DLibrary/index-eng.php?action=Sh
owOne&BID=696.
97. World Trade Organization, Trade Policy Review Report by the Secretariat Bahrain,
WTO Doc WT/TPR/S/294 ¶ 3.61 (Mar. 18, 2014).
98. New Zealand-China Free Trade Agreement, N.Z.-China, art. 79, Oct. 1, 2008
[hereinafter NZCFTA].
99. Id. at art. 81.
100. Id. at art. 83.
101. Id. at art. 85.
102. Id. at art. 86.
138
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
consultations.”103 These show that the FTAs of both sides generally affirm the
SPS Agreement without extensive WTO-plus provisions, except NZCFTA.
In contrast, the SPS and TBT chapters in CETA have widely been
recognized as extraordinarily extensive, comprising specific WTO-plus
provisions.104 They contain WTO-plus provisions that would serve as good
reference for the proposed China-GCC FTA. There are two specific
concerns for the Parties to consider. First, the GCC members, especially
Bahrain105 expressly doubt the scientific justification of import checks to
China.106 Recent food scandals undermine the confidence of GCC members
regarding the quality of Chinese food exports and, more importantly, the risk
assessment and export certification. Thus, the Parties should place emphasis
on a well-supported verification of control procedures and import checks for
maintain the confidence of GCC importers. While the “control, inspection
and approval procedures” in ChAFTA are mainly based on the SPS
Agreement,107 the SPS chapter of CETA contains provisions that prescribe
a pathway for trade partners to agree on principles and guidelines
concerning the audit and verification of control procedures.108 It also
consists of specific import requirements for priority commodities.
Therefore, it would be rewarding for the Parties to learn from CETA and
negotiate provisions for quality guidelines for scientific justification. In
particular, both sides should negotiate a specific procedure for import
requirements of those Chinese foods that have been reported as
contaminated, treating them as priority commodities.
Secondly, the GCC members have urged China to improve the
transparency and predictability of its scientific justification.109 GCC
exporters of processed food would hardly know the internal operations and
scientific basis of risk analysis adopted by Chinese authorities. This
question draws attention to the transparency of import control mechanisms.
Meanwhile, China has encouraged Saudi Arabia to enhance transparency
by allowing interested parties to comment on SPS measures.110 In Saudi
103. GCC-Singapore Free Trade Agreement, GCC-Sing., art. 2.11, Sept. 1, 2013
[hereinafter GSFTA].
104. Gonzalo Villalta Puig & Eric D. Dalke, Nature and Enforceability of WTO-plus SPS
and TBT Provisions in Canada’s PTAs: From NAFTA to CETA, 15 WORLD TRADE REV. 51,
54-57 (2015).
105. Saudi Arabia Trade Policy Review, supra note 92 at ¶ 235.
106. China Meeting Minutes, supra note 22 at ¶ 6.3.
107. China-Australia Free Trade Agreement, China-Austl., art. 5.8, Dec. 20, 2015
[hereinafter ChAFTA].
108. Villalta Puig & Dalke, supra note 104, at 67.
109. China Meeting Minutes, supra note 22, at ¶ 6.3.
110. Saudi Arabia Trade Policy Review, supra note 92 at ¶ 89.
2017]
Challenges and Opportunities GCC
139
Arabia’s latest WTO trade policy review meeting, it specifically called for
increased transparency of the approval process for Halal certifications.111 It
also raised concerns as to how SPS measures are applied and developed.112
In view of these, it would be important for the Parties to learn from
CETA’s promotion of transparency of scientific basis. First, it provides
specific transparent provisions that would help understand food safety
requirements in China.113 It would be effective to include a preliminary
briefing of SPS measures, especially Halal certifications. Secondly, it also
includes other transparency requirements regarding changes in the structure
of authorities and scientific opinions in addition to notification procedures
for updates regarding significant food safety issues and changes in disease
status. Thirdly, in response to the Chinese suggestion of a platform for
opinions from interested parties, the Parties should incorporate the requirement
of a comment period from the private sector. Better still, it can provide for a
framework specifically for stimulating constructive inputs as to mechanisms of
the application of SPS measures.
To boost predictability, the Parties would need to consider a different
approach from SPS Agreement Article 5(b). Specifically, instead of
publishing any SPS measure or TBT regulation “at an early stage, when
amendments can still be introduced,” they should consider a requirement
not to implement the concerned SPS or TBT standard at all until it has been
published. This would enable businesses to take precautions to minimize
any food risk that would restrict mutual trade.
Considering the Parties’ past FTAs, they generally affirm the TBT
Agreement. Also, the GCC Guide has taken into account the GCC
members’ various international commitments, including the WTO.
Besides, the GCCSO works to harmonize GCC standards within the
guidelines of the International Organization for Standardization. Notably,
GCC members have expressed their concern about Chinese divergence
from international standards.114 Hence, the Parties recognize international
standards as a prominent consideration for regulatory cooperation.
Regarding conformity assessment procedures, the past FTAs of both
parties generally comprise provisions on equivalence and mutual
recognition. This would suggest that the conformity assessment procedure
in the proposed FTA should adhere to the equivalence principle and the non-
111. The Kingdom of Saudi Arabia – Minutes of the Meeting, WTO Doc.
WT/TPR/M/333 ¶ 4.67, (May 31, 2016) [hereinafter Saudi Arabia Meeting Minutes].
112. Id. at ¶ 6.4.
113. Villalta Puig & Dalke, supra note 104.
114. China Meeting Minutes, supra note 22 at ¶ 6.3.
140
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
discriminatory principle for consistency.115 In other words, China should
allow exported products that fulfil the GCC standards to access the market
under equally favourable conditions and vice versa. Specifically, China should
recognize the standards adopted by the GCCSO and the GCC Guide despite
distinct technical specifications.
On the other hand, GCC members might face an additional obstacle
arising from the multiple levels of standards set up by the different regulatory
bodies in China.116 As Chinese food safety laws have often been amended and
some standards even conflict with each other,117 the GCC authorities might not
know which is the most updated Chinese food standard to follow when
assessing imports. They might incur additional costs in certifying their
compliance with technical regulations that are not based on the Chinese
authorities for conformity assessment. Meanwhile, China has expressed its
doubt about the notification of technical regulations in the UAE.118
Hence, it would be helpful to consider the WTO-plus provisions on
equivalence and transparency in CETA for reference. Concerning
equivalence, the TBT chapter in CETA contains more specific provisions
regarding recognition of equivalence.119
For instance, information
exchange on the development of similar technical regulations. This would
give GCC members more updated information about technical regulations.
A mutual recognition agreement should be considered when multiple tests
are applied for the same good. Regarding transparency, a provision that
entitles a party to request from the other party its rationale behind
conformity assessment procedures would be worthwhile.120 Better still, the
Parties should consider a provision that imposes an obligation on the
importing party to offer reasons immediately to the exporter in case of
access denial to the exported good as in CETA.121 This would be especially
helpful to GCC processed food exporters by reducing uncertainties and
unnecessary compliance costs. It also caters to small and medium-sized
enterprises (SMEs) that cannot afford expensive mandatory tests.
The second priority issue concerns the food safety and environmental
threats posed by nuclear power development. This area has been identified
115. TBT Agreement, supra note 87 at art. 5.1 & 5.1.1.
116. CHRISTINE E. BOISROBERT ET AL., ENSURING GLOBAL FOOD SAFETY: EXPLORING
GLOBAL HARMONIZATION 60 (Academic Press, 1st ed. 2010).
117. Id.
118. United Arab Emirates Trade Policy Review, supra note 65 at ¶ 247.
119. Villalta Puig & Dalke, supra note 104.
120. ChAFTA, supra note 107 at art. 6.8(4).
121. Villalta Puig & Dalke, supra note 104.
2017]
Challenges and Opportunities GCC
141
in the Sino-GCC meeting of 2016.122 China released its first software package
for exports of nuclear power in December 2015.123 Saudi Arabia has signed a
nuclear cooperation agreement to buy technology from China.124
Radioactive waste disposal constitutes an important threat to public
health.125 Also, the improper operation of nuclear reactors can pose nuclear
power accidents that generate radioactive substances that contaminate food,
threatening the health of humans, animals and plants.126 The food safety
threat arisen from nuclear power merits specific consideration in the SPS
chapter. Notably, the UAE and Saudi Arabia both have expressly
identified their need for technical assistance under TBT measures.127 The
proposed FTA would need a specific provision regarding technical
assistance like the one in ChAFTA.128 Reference can be also be made from
ChAFTA provisions regarding risk analysis and joint research on control
strategies as well as other scientific issues.129 As for the proper installation
of nuclear reactors, CETA provisions that deal with the approval of
establishments and facilities would be helpful.130 More importantly,
emergency measures are vital in case of nuclear accidents. The proposed
FTA needs enforceable obligations to notify SPS measures in case of an
emergency within 24 hours. Alternatively, reference can be found in
NZCFTA which includes an obligation to notify orally “with urgency to
contact points” followed by written confirmation within 24 hours where cases
of serious and immediate health concern occur. This requirement would be
vital to prevent nuclear accidents from causing harm to public health.
Nuclear power specifically requires the safe design of nuclear reactors
to avoid environmental threats. Trade in the software of nuclear power
122. ‘Shannon Tiezi, The Elephant in the Room During Xi’s Trip to Saudi Arabia: Iran,
THE DIPLOMAT (Jan. 21, 2016), http://thediplomat.com/2016/01/the-elephant-in-the-roomduring-xis-trip-to-saudi-arabia-iran/.
123. China Releases First Software Package for Nuclear Exports, THE ECONOMIC TIMES
(Dec. 18, 2015), http://economictimes.indiatimes.com/news/international/business/chinareleases-first-software-package-for-nuclear-power-exports/articleshow/50235122.cms.
124. Sujata Ashwarya, Saudi Arabia’s Nuclear Energy Plans: Problems, Prospects and
Politics, GULF RESEARCH MEETING (2016), http://gulfresearchmeeting.net/index.php?pgid
=MTg2&pid=MTA3OQ.
125. Rinkesh, Nuclear Waste Disposal, CONSERVE ENERGY FUTURE (2016),
http://www.conserve-energy-future.com/dangers-and-effects-of-nuclear-waste-disposal.php.
126. John P. Christodouleas, M.D., M.P.H. et al., Short-Term and Long-Term Health Risks of
Nuclear-Power-Plant Accidents, NEW ENG. J. OF MED. 2334, 2334-36 (2011).
127. United Arab Emirates Trade Policy Review, supra note 66 at ¶ 39.
128. ChAFTA, supra note 107 at art. 5.9.
129. ChAFTA, supra note 107 at art. 5.6.
130. Villalta Puig & Dalke, supra note 104.
142
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
technologies should merit specific consideration in the TBT chapter.
Regarding technical regulations, both the Parties are members of the
International Atomic Energy Agency (“IAEA”). As nuclear technology
involves advanced techniques, some hard rules regarding the adoption of
conformity assessment and safety measures of nuclear power should be
specifically provided in the proposed FTA. Reference can be taken from
CETA’s sector-specific TBT measures such as the annex on cooperation
concerning motor vehicle regulations. The regulation of nuclear reactors
might merit coverage in a specific annex in the light of Sino-GCC nuclear
cooperation agreement. As the GCC countries are generally less developed than
China in the nuclear power field,131 this would call for strong capacity-building
measures to assist GCC exporters. It would be wise to incorporate mutual
working group arrangements to cope with difficulties in cooperative regulations.
The Parties can follow ChAFTA to specifically establish committees on SPS and
TBT measures for the better implementation of the chapters.132
Notably, enforceable FTA dispute settlement provisions specifically
for SPS and TBT issues are necessary. ChAFTA uses the wording “shall
endeavor to resolve” in the provisions regarding dispute settlement in SPS
and TBT chapters.133 It is ambiguous as to the “cooperative mechanisms”
referred to in these provisions, thus these provisions are unlikely to be
enforceable. GSFTA contains parallel provisions regarding specific Dispute
Settlement Mechanisms by consultations held “within the framework of the
Joint Committee in order to find an appropriate solution.”134 Such
consultations held by the bilateral committee would be helpful to joint
cooperation of dispute resolution. Besides inclusion of a “Joint Committee,”
the proposed FTA needs to consider enforceable provisions in CETA that
allow a party to show how the other party fails to comply within a comment
period.135 While enforceability is important, the political commitment is the
most decisive factor to accomplish true regulatory convergence.136 This factor is
satisfied because the Parties have expressed their readiness to cooperate
concerning food security in the Sino-GCC strategic dialogue held in 2011.137
131. Mike Orcutt, China Will Soon Leapfrog Traditional Leaders in Nuclear Power,
MIT TECH. REV., July 27, 2015, https://www.technologyreview.com/s/539691/china-willsoon-leapfrog-traditional-leaders-in-nuclear-power.
132. ChAFTA, supra note 107 at art. 5.11, 6.12.
133. ChAFTA, supra note 107 at art. 5.10, 6.12.
134. GSFTA, supra note 103 at art. 2.10(3), 2.11(3).
135. Villalta Puig & Dalke, supra note 104.
136. Id.
137. The Second China-GCC Strategic Dialogue Held in Abu Dhabi, MINISTRY OF
FOREIGN AFFAIRS OF THE PEOPLE’S REPUBLIC OF CHINA, May 5, 2011, http://
www.fmprc.gov.cn/mfa_eng/topics_665678/yangjiechichufang_665758/t819923.shtml.
Challenges and Opportunities GCC
2017]
143
E. Trade in Services
The General Agreement on Trade Services (GATS) provides for the
MFN obligation, which emphasizes the equal treatment of service suppliers
worldwide.138 Two other key obligations are national treatment obligation
and market access obligation.139 There are four modes of supply provided in
GATS Article I. Notably, the third offers opportunities for foreign direct
investment and the fourth allows foreign individuals to enter other customs
territory themselves to provide services.
The first issue concerns whether the proposed FTA should adopt a
positive list or a negative list approach to trade in services. A negative list
approach presumes the liberalization of all sectors except those sensitive
sectors that are explicitly excluded by the trading partners. In contrast, a
positive list approach considers what items to include, one by one. A negative
list leads to deeper liberalization than the positive list. A negative list approach
would be preferred in the proposed FTA based on four main considerations.
First, the Sino-GCC relationship is strategic, implying that mutual
trade liberalization is unlikely to be politically contentious. The Parties
would be comfortable with deep integration. Secondly, both sides are open
to work together to promote the smooth implementation of the OBOR
initiative, which encompasses numerous sectors. Thus, even if the Parties
manage to attain a positive list without missing prominent sectors, the list
would be very long. Thirdly, it would be challenging to decide what to
prioritize because the political and economic environment is constantly
changing. For example, China’s chemical industry has become much more
competitive than in 2009 when Sino-GCC negotiations stalled.140 As China
would consider present opportunities and forecasted trends to decide what
to prioritize, it might overlook emerging service sectors as diversification
becomes more intense and the trade profile of the Parties changes. The
fourth consideration concerns the implicit compromise of the positive
approach, where sectors that are not included in the list would be subject to
the usual trade policy regime.
Chinese service commitments in ChAFTA, have been praised as the
best among its FTAs, excluding its Closer Economic Partnership
Arrangement with Hong Kong (CEPA).141 The incorporation of a MFN
138.
139.
140.
141.
General Agreement on Trade in Services art. II, Apr. 15, 1994 [hereinafter GATS].
Id. at art. XVII, XVI.
Wu, supra note 24.
Kate Axup et al., Focus: The China-Australia Free Trade Agreement, ALLENS
144
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
provision for services and investment in favour of Australia was hailed as
the most prominent innovation in ChAFTA.142 Meanwhile, Chinese MFN
commitments are the deepest among its FTAs.143 Hence, ChAFTA would
serve as good reference for the proposed FTA.
The second major issue concerns the area of cooperation in services
identified in China’s visit to Saudi Arabia this year.144 Notably, China has
viewed the growth in the aviation and tourism sector of the UAE as
remarkable.145 Also, the OBOR initiative would be conducive to such
cooperation, as its main objective is to enhance the connectivity of
infrastructure.146 Apart from these opportunities, four major areas regarding
market access merit specific consideration.
First, cooperation in renewable energy is of the highest priority. The
GCC has ample renewable resources such as abundant sunshine while
China has invested in renewable energy heavily. China was recognized as
the world’s leader in the installation solar plants.147 Hence, Chinese
technology firms can potentially partner with GCC developers on clean
energy projects. To ensure renewable energy can be utilized costeffectively for energy security, the Parties should consider provisions that
set obligatory targets of energy saving to be achieved by the Parties.
Meanwhile, they should negotiate a mechanism for support schemes to help
each other achieve these targets. Reference can be drawn from current EU
PTAs that have been recognized to achieve higher energy independence.148
As for market access provisions in the proposed FTA, they can
exclusively protect the investments of the GCC members in China’s
renewable energy technologies and services derived from such
technologies. Meanwhile, it would be worthwhile to include a provision
that specifically safeguards the investment of Chinese wholly owned
technology firms and regulates risks concerning the construction of renewable
energy-related facilities in the GCC. In this way, China can gain from the
(Nov. 21 2014), http://www.allens.com.au/pubs/asia/foasia21nov14.htm.
142. Interpretation for China-Australia Free Trade Agreement, supra note 46.
143. Axup, supra note 141.
144. Supra note 42.
145. United Arab Emirates Trade Policy Review, supra note 66, at para. 166, 170.
146. What We Can Expect from Xi’s Visit, CCTV (Jan. 19, 2016), http://english.cntv.cn/
2016/01/19/VIDE54wN2CkNkQ4TmTgSyYBg160119.shtml.
147. Richard Martin, China Is on an Epic Solar Power Binge, MIT TECHNOLODGY
REVIEW BLOG, (March 2016), https://www.technologyreview.com/s/601093/china-is-on-anepic-solar-power-binge/.
148. Rafael Leal-Arcas et al., Renewables, Preferential Trade Agreements and EU
Energy Security, QUEEN MARY SCH. OF L. & LEGAL STUD., Research Paper No. 208 (2015).
2017]
Challenges and Opportunities GCC
145
GCC’s rich resources while the GCC can benefit from Chinese technology.
Secondly, China has highlighted the promotion of cross-border
electronic commerce.149 Moreover, it views the UAE’s telecommunications
market as experiencing rapid growth.150 Thus, it is committed to stimulate
investment in the telecommunications market.151 Meanwhile, Qatar and
Bahrain have liberalized their telecommunications market.152
The
telecommunications market in Saudi Arabia and Oman have been recognized
as prosperous.153 These common preferences favour proactive liberalization in
telecommunications. Chinese commitments to Australia regarding market
access for telecommunications under ChAFTA have been recognized as the
most extensive to date.155 Thus, ChAFTA liberalization measures for
telecommunications would serve as a good reference for the proposed FTA.
The third area concerns the financial sector, especially banking
services. The Industrial and Commercial Bank of China, Bank of China,
and China Construction Bank have established branches in Dubai.156 The
China Development Bank and other banks have plans to establish branches
in the UAE. By establishing a commercial presence China has shown
support for the facilitation of cross-border services to the GCC. Notably,
China has expressed two concerns in the restrictions on the number of
foreign banks allowed and a relaxation of licensing requirements in
UAE.157 Addressing Chinese concerns would boost competition in the
GCC. Yet, keener competition would call for prudential regulation because
of increased risks. Notably, the survival of Islamic banks have been
challenged by the expanded product base in the overbanked market of the
GCC.158 Hence, the proposed FTA should specifically prevent domestic
regulations that safeguard the integrity of the GCC’s financial system. A
similar provision has been adopted in ChAFTA Annex 8-B, Article 3.
149. China Meeting Minutes, supra note 22 at ¶ 3.17.
150. United Arab Emirates Trade Policy Review, supra note 65 at ¶ 262.
151. China Meeting Minutes, supra note 22 at ¶ 2.9.
152. Qatar, Bahrain and Oman – Minutes of the Meeting, WTO Doc. WT/TPR/
M/296 ¶ 12.26 (June 19, 2014).
153. Assessing investment policies of member countries of the Gulf Cooperation Council,
supra note 64, at 13.
155. Factsheet: Trade in Services, AUSTL. GOV’T (July 1, 2016), http://dfat.gov.au/
trade/agreements/chafta/fact-sheets/Documents/fact-sheet-trade-in-services.pdf.
156. Muhammad Zulfikar Rakhmat, Monthly Monitor Report, GULF STATE ANALYTICS (June
2015), http://gulfstateanalytics.com/archives/work/the-uae-and-chinas-thriving-partnership.
157. United Arab Emirates Trade Policy Review, supra note 65 at ¶263.
158. Ahmad Mohammad Abu Qalbein, Challenges of Islamic Banking in Gulf
Corporation Council, 8 EUR. J. OF BUS. & MGMT. 177, 184 (2016).
146
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
The fourth area concerns ChAFTA’s market access commitment in
education. Bahrain is committed to pursue broad education reform,159
while Qatar regards human resource development as paramount.160
Meanwhile, Saudi Arabia is committed to improve its education system.161
Importantly, education has been highlighted as a top government priority in
the UAE’s third WTO Trade Policy Review, thereby calling for
considerable investment.162 Education is also one of the key sectors that
China is focused on.163 As the Parties value education services, progressive
liberalization measures in education would merit comprehensive coverage
in the proposed FTA.
Under ChAFTA, a side letter on education services encompasses joint
efforts for future work programs to facilitate student and teacher mobility
between both countries. Likewise, it would be favorable to negotiate a side
letter for future joint efforts to strengthen cooperation in education services
as in ChAFTA. Notably, concrete measures like exchange programs and
the promotion of partner’s educational institutions would enhance access to
the education market. These can build upon the already deep educational
partnership between China and the UAE.164 More importantly, these
exchange programs would potentially enable GCC nationals to have access
to quality education from China. They also help the GCC to address the
educational mismatch between the qualifications of nationals and the needs
of the private sector.165
Nonetheless, unlike Australia, it would be much more challenging for
the Parties to achieve equivalence on four grounds. First, the poor quality
of teachers in the GCC would be the main setback for educational
equivalence with China. Research has shown that GCC countries have
mismanaged the number of teachers.166 They are facing a shortage of
159. Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at ¶ 11.17.
160. Id. at ¶ 3.17.
161. Saudi Arabia Trade Policy Review, supra note 92 at ¶ 260.
162. Trade Policy Review Report by United Arab Emirates, WTO Doc WT/TPR/G/338,
¶ 8.1, 9.4 (Apr. 27, 2016).
163. China Meeting Minutes supra note 22 at ¶ 2.18.
164. Muhammad Zulfikar Rakhmat, China and the UAE: New Cultural Horizons,
MIDDLE EAST INST. (2015), http://www.mei.edu/content/map/china-and-uae-new-culturalhorizons.
165. MICHAEL STURM ET AL., The Gulf Cooperation Council Countries: Economic
Structures, Recent Developments and Role in the Global Economy, 6-37 (Occasional Paper
Series No. 92, European Central Bank 2008).
166. Michael Barber et al., Improving Education in the Gulf, THE MCKINSEY Q. 39, 40
(2007), https://abujoori.files.wordpress.com/2007/04/improve-gulf-education.pdf.
2017]
Challenges and Opportunities GCC
147
skilled teachers.167 Thus, it would be vital for GCC educational institutions
to contract with Chinese institutions for joint training programs and
performance management systems specifically for teacher quality. Secondly,
it would be difficult to achieve recognition of GCC curriculum design in
Chinese universities and colleges due to the differences in educational quality.
The education system in the Gulf is weak,168 whereas Chinese higher
education has become internationalized.169 The courses offered and the level
of certifications granted may not be comparable. Thus much harmonization
work including educational reforms in the GCC would be necessary when
the Parties organize joint exchange programs. Thirdly, both sides have to
face different marketing restrictions for attracting students to join these
exchange programs. While spending on education in the GCC has been
low,170 much spending would be necessary for marketing and recruitment
activities. Fourth, all harmonization work requires a consistently high level
of trust and understanding in the quality of professional standards and
working plans of each other.
Besides education, mutual recognition of licensing requirements is a
common challenge for service sectors, as most licensing and qualification
requirements are different. It would even be more difficult for sectors that
have more than one regulatory authority such as education and financial
services in the GCC. The Parties should negotiate a framework in the
proposed FTA that establishes a working group specifically for negotiating
mutual recognition agreements for licensing, monitoring the information
exchange of different regulatory authorities and assessments of practical
implementations so that capacity building and harmonization can be
achieved simultaneously.
The movement of service suppliers under GATS concerns crossborder service supply. China has a strong capacity of innovation and
technology. Improved access of Chinese skilled workers can help the
GCC countries better manage projects through cooperation. Also, China
has abundant strong contracting experience, which would provide good
support to human resources management.
Nonetheless, there are three challenges faced by the Parties in this
aspect. The first challenge concerns demographic imbalance. Expatriates
167. Those Who Can Do Must Teach: A New Paradigm for Teacher Training in the
GCC, THE IDEATION CENTER (2016), http://www.ideationcenter.com/blog/post/52413053.
168. Barber, et al., supra note 166, at 39.
169. Rahul Choudaha, How China Plans to Become a Global Force in Higher
Education, THE GUARDIAN (Oct. 12, 2015), http://www.theguardian.com/higher-educationnetwork/2015/oct/12/how-china-plans-to-become-a-global-force-in-higher-education.
170. Callen & Cheirf, supra note 29.
148
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
account for the dominant proportion of the workforce in the GCC’s private
sector, leaving many nationals unemployed.171 Unskilled workers make up
the majority of expatriates while skilled workers remain hard to attract and
retain.172 GCC countries lack flexible immigration policies to attract
them.173 The mobility of foreign workers in the GCC is restricted by visa
permits and a sponsorship program, which restricts the freedom of migrant
domestic workers from returning to their home country.174 These concerns are
common to all GCC countries, in particular Qatar.175 They call for provisions
that help to enhance the mobility of Chinese workers especially skilled persons.
Generally, the past FTAs of the Parties contain provisions that offer
improved access for business visitors, contractual service suppliers and intracorporate transferees. They require expeditious application procedures and
transparency provisions. Aside from these general provisions, the proposed
FTA needs to enhance market access for Chinese skilled workers as is the case
under ChAFTA. Also, an Investigation Facilitation Agreement as in ChAFTA
should be adopted in the proposed FTA allowing firms that are substantially
owned by Chinese companies to operate large infrastructure projects in the
GCC on three grounds. First, it should place no limit on workforce size.
Secondly, it should encompass numerous sectors, including
telecommunications and energy supply. Thirdly, it should lower the
threshold for expected capital expenditure. Moreover, China could provide
the GCC with an expatriate labour force to support its growing demand for
infrastructure projects especially those in the OBOR initiative.
Yet, the above provisions would not be as significant if other countries
so not also improve their immigration laws to attract Chinese workers.
Moreover, the GCC countries would face an increased need for Chinese
technological skills as their economies diversify. Notably, Saudi Arabia
has at least decided boldly on paper to grant citizenship to 1,000 skilled
workers annually, while other GCC countries have not considered this path
at all.176 A possible reason why the GCC countries generally do not
171. Callen & Cheirf, supra note 29.
172. Ingo Forstenlechner & Emilie J. Rutledge, The GCC's "Demographic Imbalance":
Perceptions, Realities and Policy Options, MIDDLE EAST POL’Y COUN. (2011),
http://www.mepc.org/journal/middle-east-policy-archives/gccs-demographic-imbalanceperceptions-realities-and-policy-options?print.
173. Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at ¶ 12.30.
174. Caroline Kelly, Facilitating Exploitation: A review of Labour Laws for Domestic
Workers in the Gulf Cooperation Council Countries, INT’L TRADE UNION CONFED. (2014),
http://www.ituc-csi.org/IMG/pdf/gcc_legal_and_policy_brief_domestic_workers_final_text
_clean_282_29.pdf..
175. Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at ¶ 13.4.
176. Mohammed Al Asoomi, Attracting Skilled Expatriates to GCC: In Theory, GULF NEWS,
2017]
Challenges and Opportunities GCC
149
consider the granting of citizenship may be concerns that their culture may
be diluted by an increased number of Chinese skilled workers in their
workplace. Yet, these worries seem to be unnecessary because Chinese
culture promotes “when in Rome do as the Romans do,” meaning Chinese
workers generally follow the traditions of the GCC countries rather than
introducing their own culture. Also, Chinese Confucianism promotes
harmony. More importantly, it should be noted that the GCC countries are
geographically far away from China. As Chinese people generally place
high value on having a permanent home and stable living, granting of
citizenship is highly likely to be an attractive option for Chinese skilled
workers. Thus, the Parties should adopt Saudi Arabia’s bold decision as a
pilot program and negotiate an implementation plan to extend this program
gradually to all GCC countries. It would then be vital to include a
framework that guides and lays down the pilot program for granting of
citizenship.
Enhancing access of Chinese workers does not mean automatic
equivalence between qualifications without the need for re-qualification.
The second challenge for the Parties would be the mutual recognition of
professional qualifications. It remains uncertain what should be the criteria
for assessing equivalence. Also, it would take much time and effort for
both sides to reach a conclusion on harmonized requirements regarding
diverse standards and procedures. The past FTAs of the Parties seem not to
have an extensive framework for mutual recognition. It would be helpful
for the Parties to refer to CETA, which has been recognized as an ideal
platform for labour mobility.177 It contains a specific chapter that serves as
a guide to the negotiation of agreements on the mutual recognition of
professional qualifications.178 It should be noted that doctors179 and
pilots180 should be given higher priority in the proposed FTA. In addition,
a Committee on Movement of Natural persons, as in ChAFTA, should be
established to smooth the implementation. Professional organizations
Jan. 12, 2012, http://gulfnews.com/business/analysis/attracting-skilled-expatriates-to-gcc-in-the
ory-1.964594.
177. Dan Ilika, Better Labour Mobility Canada’s Biggest CETA Win, Report Says, CANADIAN
MANUFACTURING, July 31, 2014, http://www.canadianmanufacturing.com/in-depth/improvedlabour-mobility-canadas-biggest-ceta-win-report-says.
178. Comprehensive Economic and Trade Agreement, art. 11, Can.-E.U., [hereinafter
CETA].
179. Cleofe Maceda, Health Care Sector in GCC Faces Talent Shortage, GULF NEWS, Jan.
10, 2014, http://gulfnews.com/business/sectors/careers/health-care-sector-in-gcc-faces-talentshortage-1.1275896.
180. GCC Aviation – Spreading Wings to the World, AL MASAH CAPITAL MGMT. LTD. (Apr.
2015), http://almasahcapital.com/uploads/report/pdf/report_134.pdf.
Hastings Int’l & Comp. L. Rev.
150
[Vol. 40:1
should be required to lead the committee on mutual recognition, as they
have better knowledge of the concrete criteria for assessments and
qualifications. The Parties should assign a specific mandate to the committee
for devising measures for ongoing equivalence as well.
The third challenge would be the transparency of qualifications. General
transparency provisions require the prompt publication of materials,
mechanisms to respond to inquiries and notification of amendment of
immigration measures to interested persons. Due to the weak administrative
capacities of GCC governments,181 the handling of publications and inquiries
are inefficient. Hence, exhortative provisions encouraging the Parties to
‘consult relevant bodies’ to negotiate ‘mutually acceptable’ criteria for
licensing and qualifications would be helpful. Model provisions can be found
in Annex 1210.5 of the North American Free Trade Agreement.
F. Investment
The major investment issue concerns the internationalization of the
Renminbi (“RMB”). All GCC countries, except Bahrain, are members of
Asian Investment Infrastructure Bank (AIIB).182 This provides an avenue to
Chinese worthy investments. The AIIB would promote the internationalization
of RMB.183 According to the RMB International Report 2015 by Renmin
University, RMB internationalization strengthens economic integration. Thus,
the RMB should be adopted to settle trade.184 The Parties should consider
adding express provisions to promote cooperation among the central banks
and to establish RMB exchange arrangements in order to enhance the
availability of the RMB and the issuing of RMB denominated bonds by
GCC investors.
Besides the redback issue, strong mutual investment interests between
the Parties present an opportunity for the liberalization of investment flows.
Apart from investments in infrastructure and engineering projects required
by the OBOR initiative, China invests in oil exploration and production in
the GCC while the GCC countries invest in Chinese oil refining and
petrochemical sectors.185 On the other hand, most GCC countries have
181. Abdulrazzaq & Carey, supra note 27.
182. Adam Bouyamourn, UAE signs up as founding member of Asian Infrastructure
Investment Bank, The national business (2015) < http://www.thenational.ae/business/bankin
g/uae-signs-up-as-founding-member-of-asian-infrastructure-investment-bank>.
183. Daojiong, supra note 2, at 101.
184. Saidi, supra note 4.
185. China Meeting Minutes, supra note 22 at ¶ 4.294.
2017]
Challenges and Opportunities GCC
151
sovereign wealth funds. Since the financial crisis, GCC investments have
turned from Europe to China.186 Notably, wealthy investors from Saudi
Arabia and the UAE are interested in investment opportunities in China.187
First, the Saudization program imposed a huge barrier to foreign
investments by mandating prior approvals.188 China challenged the
mandatory stake of local holding and minimum capital requirement in
Saudi Arabia.189 Restrictions of foreign ownership in some sectors have
been reiterated as the main concern at the latest policy review meeting of
Saudi Arabia.190 Notably, China also criticized the 49% cap of foreign
ownership in Qatar and the UAE as overly restrictive.191 On the other
hand, the GCC countries complain about the tedious procedure of
verification and approval for investments in China.192 Hence, the Parties
need to impose specific obligations on each other to relax investment
restrictions particularly those on foreign ownership in some sectors. A
model provision can be found in Article 173(b) under NZCFTA.
The second challenge would be the limited investment capacity and
market intelligence of SMEs. They may not have full access to investment
policies. China has made commitments to stimulate the growth of
SMEs.193 GCC members like Saudi Arabia have emphasized the
importance of consistency in the implementation of regulations that govern
the business environment of SMEs.194 About 90% of all businesses in
Saudi Arabia are SMEs.195 They are also important in Bahrain.196
Meanwhile, the UAE is committed to strengthen SMEs through innovative
technologies.197 These reveal the mutual interests of the Parties to boost
SMEs’ capacity and foster a good business environment for their growth.
Thus, it would be mutually beneficial for the proposed FTA to include a
specific article that enables cooperation for the promotion of SME investments.
A model provision can be found in NZCFTA, which specifically promotes a
186.
187.
188.
189.
190.
191.
192.
193.
194.
195.
196.
197.
Mo, supra note 4.
Id.
Saudi Arabia Trade Policy Review, supra note 92 at ¶ 36.
Id. at ¶ 233.
The Kingdom of Saudi Arabia Meeting Minutes, supra note 111 at ¶ 1.6.
Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at ¶3.12, 167.
China Meeting Minutes, supra note 22 at ¶ 3.16.
Id. at ¶ 2.9.
Id. at ¶ 6.3.
Saudi Arabia Meeting Minutes, supra note 112, at ¶ 2.17.
Qatar, Bahrain and Oman Meeting Minutes supra note 152 at ¶6.14.
United Arab Emirates Trade Policy Review, supra note 66 at ¶38.
152
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
“favourable trading environment” for SMEs.198
The third challenge arises from the utmost importance of transparency
perceived by both sides. China has requested Saudi Arabia to offer more
transparency in formulating investment policies.199 Also, China has called
on Bahrain to make investment regulations more transparent and
predictable.200 Meanwhile, GCC members have requested China to publish
measures concerning investment.201 Bahrain has reiterated the importance
of private sector opinions when devising new regulations on behalf of the
GCC.202 Hence, transparency provisions requiring the prompt publication of
investment measures would be essential. Requirements to notify private
investors for comments regarding any enactment or amendment of regulations
should also be included in the proposed FTA in response to Bahrain’s view.
Nonetheless, securing an FTA with provisions protecting Chinese
investments may prove difficult where trading partners have strong
investment interests in China.203 As numerous resource sectors in the GCC
are state-owned, it would be burdensome for China to negotiate with the
GCC on investment rights because state-owned enterprises in the GCC
have strong interests, especially China’s petrochemical sector. Hence, the
proposed FTA should include a framework that facilitates cooperation
between Chinese state owned enterprises with those in the GCC for the
better negotiation of investment rights.
An investor-state dispute settlement mechanism (ISDSM) would be
vital for the proposed FTA because of the expected flow of investments
between the Parties. Article 9 of ChAFTA provides for ISDSM, while
GSFTA includes no such protection. The ChAFTA ISDSM offers narrow
protection to foreign investors.204 It only enables foreign investors from
either country to claim compensation for breach of the national treatment
obligation by the other Party, subject to certain restrictions.205 Notably, it
does not contain a ‘fair and equitable treatment’ provisions. The ISDSM in
198. NZCFTA, supra note 98 at art. 176.
199. Saudi Arabia Trade Policy Review, supra note 92 at ¶ 89.
200. Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at ¶9.26.
201. Saudi Arabia, China Issue Joint Communiqué on Establishing Comprehensive
Strategic Partnership Between the Two Countries, supra note 22 at ¶ 4.95.
202. Saudi Arabia Trade Policy Review, supra note 106 at ¶ 220.
203. Christopher M. Dent, China’s Investment Provisions in its Free Trade Agreements,
ECRAN, 10 (Short Term Policy Brief 43, Feb. 2012).
204. Daisy Mallet & James McKenzie, ISDS in ChAFTA – Where’s the beef?, KING &
WOOD MALLISONS (2015), http://www.kwm.com/en/uk/knowledge/insights/isds-in-chaftawheres-the-beef-20151015.
205. ChAFTA, supra note 107 at art. 9.3.
2017]
Challenges and Opportunities GCC
153
ChAFTA might not serve as a good reference for the proposed FTA.
The ISDSM in CETA would serve as a model provision, since it has
been recognized as the most innovative arrangement for the protection of
investments.206 Two main aspects would be particularly helpful for the
proposed FTA. First, CETA’s ISDSM lays out precisely the clear standard
of ‘fair and equitable treatment’ in Article 9 without room for the discretion
of arbitrators. It provides higher predictability by laying down the factors
that constitute a breach of the obligation. Secondly, in anticipation of
increasing investment flows between the Parties, it would be necessary to
incorporate the fast track objection procedure in Articles 20 and 30 of
CETA in order to screen out frivolous claims and prevent abuse.
For transparency and predictability purposes, it would be helpful to
highlight two CETA provisions. First, the proposed FTA should include
specific provisions that enable an appellate tribunal to review legal or
factual errors of arbitral awards in order to enhance predictability in the
interpretation of investment protection provisions.207 Also, it should allow
amicus curiae submissions from interested third parties if they can help
determine the issues,208 thereby increasing procedural transparency.
G. Dispute Settlement Mechanisms
Most Dispute Settlement Mechanisms (“DSMs”) in Chinese FTAs,
except CEPA, are mainly modeled on the WTO DSM.209 ChAFTA and
GSFTA are no exception. Modelling closely on WTO system would
incorporate a comprehensive enforcement mechanism that is deemed to be
ruled-based and credible.210
In the WTO DSM, the early stages are based on a diplomatic approach
where good offices, conciliation or mediation may be “requested at any
time” and “undertaken voluntarily” if the disputants agree.211
If
consultations have not been entered or fail within 60 days, a legalistic
mechanism is adopted where disputants agree on convening an ad hoc
206. Investment Provisions in the EU-Canada Free Trade Agreement (CETA), EUR.
COMM’N (2016), http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151918.pdf.
207. Id.
208. Id.
209. Francis Snyder, China, Regional Trade Agreements and WTO Law, 43 J. OF WORLD
TRADE. 1, 1-57 (2009).
210. REGIONAL TRADE AGREEMENTS AND THE WTO LEGAL SYSTEM 346 (Lorand Bartels
& Frederico Ortino eds., Oxford Sholarship Online 2012).
211. Understanding on Rules and Procedures Governining the Settlement of Disputes art.
5(1), 5(3), Apr. 5, 1994, 1869 U.N.T.S. 401 [hereinafter DSU].
154
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
panel. The panel will then issue a final report.
The first issue in devising a DSM is whether it should be based on a
diplomatic or legalistic mechanism.212 Diplomatic dispute settlement
favours only consultations without legal provisions. Disputants may refer
disputes to either third-party adjudicators or a political body for consultation.
A legalistic mechanism refers to ad hoc referral to an arbitral tribunal as in the
WTO DSM. Both mechanisms have their own merits and drawbacks.
Legalistic DSM poses two main challenges to the negotiation of the
proposed FTA. The first challenge stems from political economic constraints.
First, academics have asserted that a legalistic DSM would undermine the
power and political autonomy of national governments.213 The Chinese
government views law as a means of control and would be unlikely to support
a legalistic mechanism that promotes rule of law. Meanwhile, the GCC
governments are monarchies and do not care much for human rights. Indeed,
the separation of powers is not a practice in the GCC. Secondly, the Chinese
government perceives litigation with other countries as a setback to
diplomatic ties.214 Litigation seems to run counter to China’s “going out
strategy,” which promotes further economic integration with the outside
world. Hence, legally binding forms of DSM, including litigation and
arbitration, seem to be contrary to the political will.
The second challenge arises from the Chinese Confucianism. China
has a long history of mediation based partly on Confucianism, which
proposes cordiality in commercial and personal deals. Since Confucian
ideas have great influence on Chinese policies,215 Chinese people generally
think that litigation can adversely interfere with social harmony for two
reasons. First, Chinese people generally believe that litigation is an
indication of hostility rather than an avenue to resolve disputes. Although
the rule of law is supposed to be objective, litigation becomes the
profession of a desire to win when the respective advocates both believe
that the law supports their arguments.216 Secondly, a winning party may
still be condemned even if it wins a case. Most Chinese people believe that
212. AMELIA PORGES, PREFERENTIAL TRADE AGREEMENT POLICIES FOR DEVELOPMENT: A
HANDBOOK 474 (World Bank Group 2011).
213. James McCall Smith, The Politics of Dispute Settlement Design: Explaining Legalism in
Regional Trade Pacts, 54 INT’L ORG. 137, 145 (2000).
214. MING JIANGLI, CHINA JOINS GLOBAL GOVERNANCE: COOPERATION AND
CONTENTIONS 84 (Lexington Books 2012).
215. Razeen Sappideen & Ling Ling He, Dispute Settlement Under Free Trade
Agreements: The Proposed Australia-China Free Trade Agreement, 12 J. OF WORLD INV. &
TRADE 581, 595-96 (2011).
216. Claude Barfield, WTO Dispute Settlement System in Need of Change, 37 INTERECONOMICS
131-135 (2002).
2017]
Challenges and Opportunities GCC
155
litigation would cause disputants to “lose face.” As Confucianism regards
litigation to be a last resort, the commencement of legal proceedings would
indicate a dispute to be so serious that it cannot be settled without incurring
legal cost and time. Regardless of the ruling, the relations of the disputants
would have deteriorated during proceedings.
On the other hand, litigation provides more predictability and
certainty. It enables a disputant to gain full discovery of the arguments of
the opposite case. Arbitration has been hailed as a more workable DSM in
China.217 Meanwhile, the GCC countries have the Unified Arbitration Law
of 2009, recognizing arbitration in the GCC. Arbitration seems to address
the above Confucian concerns. First, arbitration enables disputants to select
an arbitrator by agreement and both sides take part in the resolution process.
There might be some forms of cooperation between the disputants, giving
them significant flexibility for parties to tailor their DSM according to their
needs. Thus, it preserves their relationship under a cooperative framework.
Second, arbitration is a private process that ensures greater confidentiality
than litigation. Parties can protect their sensitive information from
disclosure to the public. Therefore, disputants do not have to worry about
losing their reputation.
Nonetheless, disputes arising from cultural differences may be
challenging to resolve and may remain unsettled long after arbitration.
Worse still, some cultural principles might have to be compromised.
Arbitrators might even face a dilemma when deciding which value should
prevail based on a broad notion of justice. Hence, the proposed FTA
should incorporate a code of conduct for arbitrators, one that upholds their
independence and impartiality. Still, the standard adopted by the arbitrator
is still subject to perceptions and how they weigh in on the arguments.
These disadvantages of arbitration might call for a mechanism that
increases the parties’ involvement in the solution.
Diplomatic DSM comprises consultations or conciliation, involving an
impartial third party who will suggest a settlement for the parties to agree
on. It enables the parties to negotiate flexible solutions that are more
mutually amicable. Thus, parties are more likely to voluntarily comply
with the obligations arising from the solution. Also, negotiators generally
perceive alternative dispute resolution to be a rewarding experience as
evidenced by its wide adoption.218 However, this mechanism does not
enable full discovery and access to a formal judicial system, thus it may be
harder to reach decisions.
217. Sappideen, supra note 215.
218. ChAFTA, supra note 108 at art. 15.6; GSFTA, supra note 104 at art. 9.3.
156
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
In view of these considerations, the DSM for the proposed FTA
should balance the importance of formality and the flexibility to cater to
pragmatic needs. Thus, the DSM of the proposed FTA should be closely
modelled on the WTO DSM, which provides for both diplomatic and
legalistic approaches of dispute settlement in incremental stages.
It would be helpful to consider the nature of future disputes to tailor
the mechanism and enhance the resolution of disputes arising from the
proposed FTA. The Parties have agreed to commit to extensive market
access in services trade, an area of potential conflict. Moreover, conflicts
concerning divergent customs, procedures, and jurisdictional issues would
arise from efforts to cooperate on technical standards for OBOR related
infrastructure projects. In addition, the Parties have signed other FTAs
with other countries before this proposed FTA. Possibly, jurisdictions may
overlap for certain breaches concerning several FTAs.
In view of these potential conflicts, the DSM should also allow for
diversity. Diverse disputes would call for higher flexibility and expediency
in the DSM. First, it would be helpful to refer to Article 15.4(2) of
ChAFTA for the right to select a suitable forum and Article 14.3(2) of
CETA for the exception. The “choice of forum” and the right to use the
chosen forum ‘to the exclusion of others’ provide more flexibility and
avoid recurrence of disputes due to unresolved jurisdictional issues. For
more comprehensiveness, the proposed FTA may incorporate the exception
in Article 14.3(2) of CETA where the same breach can be brought in
another forum when the chosen forum fails to make a finding for
procedural and jurisdictional reasons.
In response to food safety issues, a specific provision for urgent
proceedings concerning “perishable or seasonable goods” may be
particularly helpful for the proposed FTA. To increase legal predictability,
it would be necessary to provide a clear definition of “perishable” or, at the
very least, guidance for interpretation. Reference can be drawn from
Article 29.4(4) of CETA.
While the proposed FTA would be modelled on the WTO DSM and
thus it would contain similar provisions regarding “role of experts,”219
predictability and consistency are necessary for quality of the panel
process. The Parties can consider two WTO-plus provisions that have been
adopted by China’s FTAs. First, for procedural consistency, the DSM of
the proposed FTA should prescribe model rules of procedure, such as
written submissions and hearings for the arbitral tribunal to follow as in
219. DSU, supra note 211 at art. 13.2.
2017]
Challenges and Opportunities GCC
157
ChAFTA.220 Secondly, higher consensual elements may be incorporated to
boost predictability. The proposed FTA needs a provision, as in NZCFTA,
which enables the disputants to comment on technical advice and the
arbitral tribunal to takes their comments into account.221
Enforceability is essential for an effective DSM. The WTO DSM
does not guarantee that the defendant will comply with the panel ruling. It
only provides a final report as to which disputant is wrong.222 The
complainant can only self-enforce a ruling by requesting negotiations for
compensation or authorization from the Dispute Settlement Body to retaliate
by suspending concessions. The effectiveness of panel rulings in the WTO
DSM seem to depend on the ability of the disputants to self-enforce.
While the proposed FTA would be modelled on WTO, it may consider
adding three main WTO-plus features to the compliance procedure of the
arbitration panel’s decision with reference to GSFTA. First, it should
provide an alternative route for the complaining party to enter into
negotiation with the party in breach of the agreement to “develop mutually
acceptable compensation.”223 This favors Chinese Confucianism practices,
which prefer amicable negotiations before resort is made to the arbitration
panel to suspend concessions. Secondly, upon the suspension of concessions,
the proposed FTA should address possible disputes regarding whether the
level of suspension is overly excessive by the original arbitral panel.224
This provides a more comprehensive enforcement mechanism, which
safeguards the interests of the defendant if it believes that the level of
compliance is too excessive notwithstanding its willingness to comply.
Thirdly, the proposed FTA should offer certainty and predictability by
stating that the award of the arbitration panel is “final and binding.”225
Better still, to boost the efficiency of the DSM, a slight variation
regarding the suspension of concessions contained in CSFTA is
noteworthy.226 By adopting such variation, the proposed FTA can entitle
the arbitral panel to rule on the level of suspension when it conducts a
compliance review.
220. ChAFTA, supra note 107 at annex 15-B.
221. NZCFTA, supra note 98 at art. 191(5).
222. Marc L. Busch & Eric Reinhardt, Bargaining in the Shadow of the Law: Early
Settlement in GATT/WTO Disputes, 24 FORDHAM INT’L LAW J. 158, 159-165 (2000).
223. GSFTA, supra note 103 at art. 9.9(1).
224. Id. at art. 9.9(5).
225. GSFTA, supra note 103 at art. 9.8; ChAFTA, supra note 107 at art. 15.16(7).
226. China-Singapore Free Trade Agreement, China-Sing., art. 102(3), Jan. 1, 2009.
158
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
V. Conclusion
Labor-abundant China and oil-rich GCC countries have been
diversifying their energy relations beyond oil recently, boosting their
growth prospects in manifold sectors. China’s OBOR initiative potentially
opens up gateways for Sino-GCC relations in numerous sectors. Moreover,
the GCC countries’ high dependence on expatriates creates opportunities
for China’s excess industrial capacities. Besides a favorable political
economy and strong political commitment, the Parties do not have any dispute
over human rights, which is the main setback to EU-GCC FTA negotiations.
Moreover, they have pledged to work together to protect their security ties,
especially the OBOR lanes and the settlement of the Syria conflict.
Nonetheless, there are still challenges that the Parties need to
overcome, especially the attainment of mutual recognition in various
service areas because of the low educational standards and restrictive
immigration policies of the GCC countries. Moreover, the Parties
emphasize the need for increased transparency in diverse areas, including
conformity assessment procedures, investment regulations, licensing
requirements and China’s scientific justifications of SPS measures. The
various laws and issues involved in OBOR related projects would call for a
DSM and an ISDSM that ensure certainty and efficiency.
While the proposed FTA would be modelled on the WTO framework
as in past FTAs, it can address its specific challenges with reference to
WTO-plus provisions, especially in ChAFTA for services trade and
GSFTA for DSM. Meanwhile, CETA innovations for Mode 4 services,
investments, ISDSM, SPS and TBT issues would be helpful. The proposed
FTA should include a framework requiring positive actions to create
investment opportunities, a platform for inputs from the private sector for
increased transparency, a prominent role for professional organizations in
equivalence, and the granting of citizenship for Chinese skilled workers.
On the whole, capacity building should be the ongoing key for overcoming
the challenges and realizing the opportunities of the proposed FTA given
the importance of technical cooperation in most high priority areas,
especially nuclear development, green energy, and education.
Background Checks and Employment Discrimination:
Distant Parallels between U.S. and EU Privacy
Regimes
BY EUGENE FRID*
In 2012, Halstead Management Company offered Kevin A. Jones a job as
a doorman in New York City. After the company requested a criminal
background check on Mr. Jones, his offer was rescinded. Although Mr. Jones
had no criminal record, Sterling Infosystems, the large company tasked with
doing the background check, mixed up his information with the information of
Kevin M. Jones, a different man with at least three criminal convictions.1
In California, a fifty-two-year-old man worked a series of odd jobs until
he was finally hired full-time at a dairy farm. Days before starting his job, the
man was arrested for failure to pay child support. After hiring a background
check company to investigate the man’s criminal history, the farm revoked its
offer. The job that would have helped this employee meet his child support
obligations was yanked from his grasp because his employer saw an arrest on
his record. This arrest had no bearing on his competency as a farmer.
Similarly, in Illinois, an African-American man was finally getting his
life back on track when he found employment at the retail chain Dollar
General. At the eleventh hour, the offer was revoked because of a criminal
background check that disclosed a six-year-old conviction for possession of a
controlled substance.2 In that case, the Equal Employment Opportunity
Commission (“EEOC”) filed charges alleging Dollar General conditioned its
job offers on criminal background checks, which results in a disparate impact
against African Americans.3 Unfortunately, no guiding case law stems from
*J.D. Candidate 2017, University of California, Hastings College of the Law; B.A.,
University of California, Davis (2010). I would like to thank Professor Reuel Schiller for his
invaluable guidance on this project. I would also like to thank my family and friends for
their support, as well as my colleagues at HICLR for their hard work on the publication.
1. Dan Fleshler, You should fear background checks even if you’ve done nothing
wrong, QUARTZ (May 23, 2014), http://qz.com/211178/you-should-fear-backgroundchecks-even-if-youve-done-nothing-wrong/.
2. U.S. Equal Employment Opportunity Commission v. DolgenCorp, L.L.C., EEOC,
2014 WL 3734361 (No. 13-CV-04307), (N.D. Ill. 2014).
3. Ben James, Dollar General Rips Rulings In EEOC Background Check Suit, LAW
160
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
this matter because Dollar General settled the case in 2015.
These stories demonstrate the severe detriment that preemployment
criminal background checks have on individuals. Background checks are error
prone and subject applicants to denials for reasons not related to job function.
In other words, even if there is no error, many employers still reject applicants
with a criminal record without having a sufficiently justified business reason
for doing so.
While it is legitimate for banks not to hire convicted embezzlers, or
for trucking companies not to hire drunk drivers, in the case of the dairy
farmer, his failure to pay child support had no foreseeable impact on his
ability to milk cows. Consequently, in the absence of legitimate business
or safety concerns, employers that deny qualified people a job only
perpetuate a vicious cycle of unemployment and increase poverty levels in
the United States.
Conversely, an employer has a right to know information about the
person he is going to hire and entrust to perform the functions of his
business. More information helps an employer make a more informed hiring
decision. One reason an employer would want to hire an individual with no
criminal record over another with a record is due to efficiency. If a person has
a prior arrest, he may be more likely to get rearrested and not show up for
work, thereby leaving the employer short staffed with no prior notice.
Several conflicting interest have arisen as a result of overzealous
background checks. On the surface, you have the frustrated employer who is
concerned about employee reliability and vicarious liability lawsuits for
tortious actions caused by their employees while on the job. Consequently,
employers use background checks as a means to weed out unreliable or violent
workers. Underneath this layer, you have the greater concern for society. The
market is distorted when able Americans are unable to work due to reasons not
related to their skills. They are restricted from contributing to the market, both
because they are unable to provide labor and because of their lowered spending
power. Lastly, and most importantly, the individual suffers. Not only is the
person financially constrained, but their core American privilege “ . . . to
engage in any common occupations of life”4 is forever restricted based on
their prior bad acts. To enjoy such a privilege has long been recognized at
common law as essential to the orderly pursuit of happiness by free men.5
360 (May 21, 2015), http://www.law360.com/articles/658872/dollar-general-rips-rulings-ineeoc-background-check-suit.
4. Meyer v. Nebraska, 262 U.S. 390 (1923).
5. Id.
2017]
I.
Background Checks & Employment Discrimination
161
Exploring the Numbers
Recent surveys found that nearly 80% of U.S. employers perform
background checks on current and potential employees.6 In addition, almost
nine in ten large companies conduct criminal background checks.7 While
some companies focus solely on felony convictions, others also look at
misdemeanors and arrests without an indictment. A 2010 study found that
nearly one in three U.S. adults - over seventy million people - had a serious
misdemeanor, felony arrest, or conviction that could show up on a routine
employment background check.8 In contrast, nine years earlier in 2001, only
about 20% of adults - approximately forty-two million people - had a criminal
record that was listed on a criminal history record system.9
Post-September 11, 2001, safety concerns, coupled with fear of employer
liability and negligent hiring claims, contributed significantly to the rise in the
availability of criminal records. Additionally, there is no shortage of work for
the screening companies who run dragnet information mills because
approximately one quarter of the U.S. population has some type of criminal
record, and 9% of the population has been convicted of a felony.10 These
vendors who use information processing technologies have exceptional power in
their hands. They can dramatically influence the lives of people on the cusp of a
job at the click of a button.11
6. U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis,
AMERICAN BAR ASSOCIATION (Mar. 11, 2013), http://www.americanbar.org/news/abanews
/aba-news-archives/2013/08/u_s_strengthens_reg.html.
7. Maurice Emsellem and Jason Ziedenberg, Strategies for Full Employment Through
Reform of the Criminal Justice System, CENTER ON BUDGET & POLICY PRIORITIES (Mar. 19,
2016), http://www.cbpp.org/research/full-employment/strategies-for-full-employment-throughreform-of-the-criminal-justice.
8. Id.
9. Id.
10. Ruth Graham, How criminal records hold Americans back, THE BOSTON GLOBE
(Mar. 08, 2015), https://www.bostonglobe.com/ideas/2015/03/08/how-criminal-recordshold-americans-back/bFnOmPhZKeimlafcPU5mmI/story.html.
11. Chad Terhune, The Trouble with Background Checks, BLOOMBERG BUSINESS WEEK
(May 28, 2008,), http://www.bloomberg.com/news/articles/2008-05-28/the-trouble-withbackground-checks.
162
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
II. Consequences
Nowadays, a fresh start can seem impossible for people who have any
type of criminal history,12 but even then, some people face more severe
consequences than others. While over seventy million U.S. adults have a
criminal record that can show up in a routine background check, it is
people of color in communities already hit hard by unemployment that are
disproportionately disadvantaged.13 The Center on Budget and Policy
Priorities announced that “while the official unemployment rate for those
actively looking for work in early 2015 stands at 5.5%, the AfricanAmerican unemployment rate is 10.4%, and the rate for African-American
teens (ages 16-19) is 30%, about double the rate of white teens.”14 Studies
have also shown that having a job with decent wages is associated with
lower rates of reoffending, while reductions in wages lead to increases in
illegal earning and criminal activity.15
Furthermore, the less likely an employer is to hire an individual with a
criminal history, the more likely that person will abstain from contributing
lawfully to society,16 thereby increasing the risk of recidivism.17 Even an
old criminal offense can significantly disadvantage a qualified individual’s
job prospects18 because some employers automatically stick their resumes
in the “maybe” pile, which may never be seriously considered. To other
employers, the stigma of an arrest can be so off-putting that they do not
even consider applicants with a criminal record.19
In reality, applicants with a felony record are about half as likely to be
called back for an interview as similar candidates without a felony record.20
12. Graham, supra note 10.
13. Emsellem & Ziedenberg, supra note 7.
14. Id.
15. Jeremy Travis, Amy L. Solomon & Michelle Waul, From Prison to Home, The
Dimension and Consequences of Prisoner Reentry, URBAN INSTITUTE JUSTICE POLICY CENTER,
31 (Apr. 4, 2016), http://research.urban.org/UploadedPDF/from_prison_to_home.pdf.
16. Binyamin Appelbaum, Out of Trouble, but Criminal Records Keep Men Out of
Work, N.Y. TIMES (Feb. 28, 2015), www.nytimes.com/2015/03/01/business/out-of-troublebut-criminal-records-keep-men-out-of-work.html?_r=0.
17. Travis, Solomon & Waul, supra note 15 at 31; see also Bryan Knedler & William
Welkowitz, 2014 Laws Limit Private Sector Employers' Use of Criminal History Information,
BLOOMBERG BNA DAILY LABOR REPORT (Jan. 20, 2015), http://www.bna.com/2014-laws-limitn17179922256/, (“Some practitioners believe that in states with background-screening laws,
significantly more individuals with criminal records are hired and there's a substantial reduction
in criminal recidivism rates.”).
18. Emsellem & Ziedenberg, supra note 7 at 4.
19. Travis, Solomon & Waul, supra note 15 at 31.
20. Emsellem & Ziedenberg, supra note 7 at 4.
2017]
Background Checks & Employment Discrimination
163
The problem is exacerbated when lower paying employers, such as fast-food
chains, perform background checks.21 When these checks turn up a record, the
candidates are often denied an entry-level position that could help them make a
living. Those employers that are unwilling to consider candidates with a
criminal record for subsistence wage jobs are putting a strain on the broader
U.S. economy. The failure to hire a large population of people with felony
convictions recently cost the United States approximately 0.4 to 0.6 percentage
points of the gross domestic product, or roughly $57 billion to $65 billion.22
It is not just unemployed people with criminal records who feel the damage,
but also members of society who do not possess a criminal record are affected.
The cost of unemployment gets passed onto taxpayers because “the harder it is for
an ex-offender to earn a living . . . the higher the costs to taxpayers for the social
services he must rely on instead.”23
Furthermore, it is bad policy for the economy to have an entire class of
people for whom the mainstream labor market is out of reach.24 Instead, if
employers rely less on background checks, or those background checks are
more tailored to the job functions, then ex-offenders would have a better
chance at getting jobs. If that happens, recidivism rates would likely decrease,
because people would be busily and gainfully employed, rather than out on the
streets. Ex-offenders would have a structured routine, a steady income stream,
and most importantly, gain greater self-esteem.25 Therefore, employing exoffenders would ameliorate at least some aspects of the perpetual poverty cycle
plaguing their lives and the U.S. economy. It is in our nation’s best interest to
enact stricter employment screening policies, just like a number of other developed
democracies have already done. A closer look at the European Union’s (“EU”)
privacy laws is a good place to start.
III.
History in the European Union
Although the U.S. and the EU are
economic powers, they differ greatly in
preemployment background checks. The
different approaches in their attempts to
two of the world’s leading
their approach to regulating
two governing bodies “have
regulate the use of personal
21. Appelbaum, supra note 16.
22. Emsellem & Ziedenberg, supra note 7 at 5.
23. Graham, supra note 10.
24. Id.
25. See Elena Larrauri & James B. Jacobs, European Criminal Records & Ex-Offender
Employment, New York University Public Law and Legal Theory Working Papers, NELLO
LEGAL SCHOLARSHIP REPOSITORY (Mar. 19, 2016), available at http://lsr.nellco.org/cgi/view
content.cgi?article=1532&context=nyu_plltwp.
164
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
information in the information society.”26 Specifically, in the EU, and
increasingly across the developing world, a job applicant’s right to privacy
trumps an employer’s right to collect information about a potential
employee.27 A historical analysis is key to understanding the formation of
the different privacy doctrines adopted by the United States and EU.
Countries within the EU once faced severe oppression in the face of
authoritarian governments. Distrust of government stemmed from, among
other reasons, the thousands of secret informers working on behalf of the
Ministry of State Security (STASI) of East Germany to listen and transcribe
the phone calls of private citizens.28 As a result, “in Europe, where people
have had dictatorships, data protection is declared as a human right and
regulated by comprehensive data protection legislation.”29 Much like privacy,
“data protection finds its roots in the idea that democratic societies should not
be turned into societies resting on control, surveillance, actual or predictive
profiling, classification, sorting, and discrimination.”30 Moreover, “it is not
only a matter of individual liberty, intimacy, integrity, and dignity of
individuals but a wider personality right aimed at developing people’s social
identity as citizens.”31 For these reasons, the EU adheres to strict privacy laws
that govern and restrict the free flow of individuals’ private information.
IV. American Jurisprudence
U.S. jurisprudence, on the other hand, is not grounded in the concept of
employee privacy, but is skewed to favor employer discretion.32 Unlike the
EU, where data protection and privacy laws are considered human rights and
are drafted into member states’ legislation,33 there is no data privacy rights
26. Daniel Dimov, Differences Between the Privacy Laws in the EU and the US, INFOSEC
INSTITUTE (Mar. 19, 2016), http://resources.infosecinstitute.com/differences-privacy-laws-in-euand-us/.
27. Fleshler, supra note 1.
28. Dimov, supra note 26.
29. Id.
30. FREDERICO FERETTI, EU COMPETITION LAW, THE CONSUMER INTEREST AND DATA
PROTECTION: THE EXCHANGE OF CONSUMER INFORMATION IN THE RETAIL FINANCIAL
SECTOR, 105, (Springer 2014).
31. Id.
32. U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis,
supra note 6.
33. Id.
33. Edith L. Curry, To Snoop or Not to Snoop: Privacy Rights of Applicants and
Potential Employees, AMERICAN BAR ASSOCIATION (Mar. 27, 2016), http://www.american
bar.org/publications/gp_solo/2012/november_december2012privacyandconfidentiality/to_s
2017]
Background Checks & Employment Discrimination
165
expressly outlined in the U.S. Constitution. “Americans do not have an
express constitutional right to privacy, unlike free speech, the right to a speedy
trial, and the right to bear arms expressly granted in the U.S. Constitution.”34
Instead, privacy rights in the United States “derive from a disjointed collection of
constitutional interpretations, statutes, and common law.”35
Since the tragic events of September 11, 2001,36 and the subsequent
adoption of the Patriot Act, the United States has reduced its restrictions on
personal data collection by law enforcement agencies.37 The Patriot Act
addresses surveillance of electronic communications and empowers the National
Security Agency (NSA), the U.S. Department of Justice, and other federal
agencies to detect and prevent possible acts of terrorism.38 The Act also removes
legal barriers that had blocked law enforcement agencies from sharing
information about potential terrorist threats and coordinating efforts to respond to
them.39 However, with such intrusive data monitoring tactics come legitimate
outcries from civil liberties groups about data privacy rights of U.S. citizens.
Most notably in 2013, concerns over privacy were raised when Edward
Snowden leaked information showing that the NSA was using the Patriot Act as
a facade to justify its bulk collection of data about millions of American phone
calls.40
The Patriot Act gave the U.S. government more power and access to
acquire private information about domestic individuals. Consequently, once law
enforcement agencies collect data, including arrest records that ultimately
become public record, an individual’s information is likely to end up in the
hands of commercial background-screening agencies and ultimately, in the
hands of potential employers.
noop_or_not_privacy_rights_applicants_potential_employees.html, discussing that the EU
views privacy as a human right as outlined in the Convention for the Protection of Human
Rights and Fundamental Freedoms; The Privacy Directive has been ultimately adopted into
law within each member state).
34. Id.
35. Id.
36. See, e.g., Terhune, supra note 11 (“Some employers have grown more vigilant
about hiring since the September 11, 2001 terrorist attacks.”).
37. Dimov, supra note 26.
38. Margaret Rouse, USA Patriot Act, TECH TARGET (May 27, 2016), http://searchdata
management.techtarget.com/definition/Patriot-Act.
39. Id.
40. Id.
166
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
V. Accessing Criminal Records
Unlike in most European countries, where court files are considered
confidential,41 access to court and arrest records in the United States are
easily accessible by the public. Many people lose out on a chance at
legitimate employment when either the employer, or screening firms they
hire investigate their candidates’ personal background through the use of
public records.42 Without employment options, thousands of young men
and women become trapped in a cycle of poverty and incarceration,43 which is
why one of the biggest impediments to employment in the United States is a
criminal record.44 There is a clear connection between lost job opportunities
due to background checks and the increasing poverty and economic strife
experienced by those that are unemployed. Despite the correlation, employers
are nevertheless incentivized to use third party screening services to spare their
human resource departments’ time and money. “The proliferation of
background checks by employers is driven largely by the cheap and ready
access to criminal history information provided by both the commercial
background check industry and the public sources that collect
unprecedented amounts of criminal history information.”45
These
investigative services are highly profitable because there is so much raw
information available and a large network of vendors ready to deliver it to
curious employers.46 It is no surprise that the $4-billion business of
background screening is booming in the United States.47
VI.
Money in the Screening Industry
When employers look to hire a screening company, they often turn to
ChoicePoint, the largest screening firm for corporate employers in the United
States.48 This company alone conducts approximately ten million background
checks per year and controls roughly 20% of the U.S. screening market.49 First
Advantage, a competitor based in California, recently reported a revenue growth
41.
42.
43.
44.
45.
46.
47.
48.
49.
Graham, supra note 10.
Id.
Id.
Id.
Emsellem & Ziedenberg, supra note 7 at 10.
Graham, supra note 10.
Terhune, supra note 11.
Id.
Id.
2017]
Background Checks & Employment Discrimination
167
up 20% to $233 million.50 Profit potentials were too great for Dutch information
provider Reed Elsevier Group (RUK) to sit back and not grab a piece of the
growing market, which is why it acquired ChoicePoint for $4.1 billion.51 Chad
Terhune from Bloomberg BusinessWeek explains that this market is the Wild,
Wild West because it is an unregulated industry with easy money and lacks a
huge emphasis on compliance or on hiring quality people to perform the
screening.52
VII. Screening Flaws
While employers are saving time and money, and screening
companies are swimming in profits, the people directly affected by the
background checks are suffering from the lack of regulation. This is
especially true for qualified job applicants who are mistakenly flagged for
having a criminal record. The problem with employment background
checks is exacerbated by error-filled and untrustworthy information within
the reports, such as the reporting of expunged records or dropped charges.53
The information obtained by vendors sometimes contains errors,
innuendos, or outright falsehoods.54 Another problem is when databases
include arrest records without any indication of whether the person was
convicted.55 Often, screening companies rely on bulk databases that have
not been properly updated.56 In those cases, outdated or incomplete
information is likely to be conveyed to the employer whenever a screener
does not bother to check a person’s original court record to verify the status
or disposition of a case. Needless to say, this happens quite often.
Poor reporting and misinformation causes irreparable harm to many
qualified workers.57 A noteworthy example of such grave misreporting
occurred after September 11, 2001, when the U.S. government began
checking the backgrounds of 1.2 million workers at the nation’s ports.58 A
law, which mandated the exclusion of anyone with a conviction in the last
seven years before September 11, 2001, resulted in the exclusion of 59,000
50.
51.
52.
53.
54.
55.
56.
57.
58.
Id.
Id.
Id.
Graham, supra note 10.
Terhune, supra note 11.
Appelbaum, supra note 16.
Fleshler, supra note 1.
Emsellem & Ziedenberg, supra note 7.
Appelbaum, supra note 16.
168
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
workers.59 However, 30,000 of those workers filed appeals arguing that
their records were inaccurate. In 25,000 of those cases, a more careful
investigation found no evidence of a conviction.60 To reiterate, when the
background check system identified a felon, it was wrong at least 42% of the
time.61
VIII. Why Do Employers Continue to Use Background Checks
if They are Error Filled or Not Relevant to the Job?
Why do employers continue to use error-prone or irrelevant
background checks? The answer, in part, is employer liability and safety.
In California, for example, an employer can be liable to a third person for
negligently hiring an unfit employee.62 Additionally,
negligence liability will be imposed on an employer if it “knew or
should have known that hiring the employee created a particular
risk or hazard and that particular harm materializes.”63
Thus, while employers are becoming more dependent on mass-produced
background reports that “rely heavily on anonymous, and sometimes
inaccurate or unfair sources,”64 they do so “to protect their customers, their
employees and themselves from criminal behavior.”65 Specifically, the
Society for Human Resources Management conducted a survey and
determined that approximately two-thirds (69%) of organizations reported they
conduct criminal background checks on all of their job candidates. In addition,
roughly half of the organizations conduct criminal background checks to
reduce legal liability for negligent hiring (52%) and to ensure a safe work
environment for employees (49%).66 Should an employee ever harm a coworker or customer, the employers’ failure to perform an adequate background
check could lead to costly “negligent hiring” litigation, especially if evidence of
59. Id.
60. Id.
61. Id.
62. Getting Greater Global Results-Ebook, FIRST ADVANTAGE, 7 (Mar. 27, 2016),
https://www.fadv.com/Portals/0/Downloads/ebooks/FirstAdvantage-Getting_Greater_
Global_Results-ebook.pdf.
63. Phillips v. TLC Plumbing, Inc., 172 Cal.App.4th 1133, 1139 (2009); See, generally,
California Civil Jury Instructions (CACI), 426. Negligent Hiring, Supervision, or Retention
of Employee (2009).
64. Terhune, supra note 11.
65. Appelbaum, supra note 16.
66. Background Checking: The Use of Criminal Background Checks in Hiring Decisions,
SOCIETY FOR HUMAN RESOURCES MANAGEMENT, (Mar. 19, 2016), available at
https://www.shrm.org/research/surveyfindings/articles/pages/criminalbackgroundcheck.aspx.
2017]
Background Checks & Employment Discrimination
169
such behavior could have been discovered prior to the hiring.67 For this reason,
there is an industry perception that it is irresponsible for employers to ignore
readily available employee information.68
Alternatively, in the EU, the extent to which employers may be held
liable for their employees’ activities is often statutorily limited. Therefore,
employee monitoring is not as necessary to reduce liability as it is in the
United States.69
IX. Moving In The Right Direction
While there are no guarantees that the unpleasantries of unemployment
will fully cease, “increasing the employment rates of people with criminal
records, which increases the labor supply, will likely increase economic
growth; and the economy’s potential growth rate is partly a function of the
growth of labor supply.”70 The ongoing link between unemployment and the
financial crisis that the United States has faced in the last decade has called for
more regulation on employee background checks.71 Fortunately, the recent
increased attention to the regulation of background checks has begun to move
the United States closer to laws in the EU, where employment screening on the
basis of a criminal record is rare and exceptional.72
As noted above, EU’s legislature contains data privacy laws designed
to explicitly protect citizens’ rights to privacy. The right to privacy law is
based on the notion that “employers have no right to snoop around in
employees’ lives.”73 The idea is that employers should only perform
background checks on their employees or potential candidates if it is
necessary for the job. Also, in order for the background check to be
performed, “there is an obligation to retrieve the data directly by asking the
candidate and not doing the background checks in the first place.”74
67. Curry, supra note 33.
68. Appelbaum, supra note 16.
69. Miriam Wugmeister, Comparing the U.S. and EU Approach to Employee Privacy,
MORRISON FOERSTER (Apr. 02, 2016), https://www.mofo.com/resources/publications/comparingthe-us-and-eu-approach-to-employee-privacy.html.
70. Emsellem & Ziedenberg, supra note 7.
71. U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis,
supra note 6.
72. Elena L. Pijoan, Legal Protections Against Criminal Background Checks in Europe,
16 (I) PUNISHMENT & SOCIETY 50, 50-73 (2014).
73. U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis,
supra note 6.
74. Id.
170
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
While data privacy laws in the EU vary across the different member
states, each participant follows general guiding principles that stem from
the Data Protection Directive and the E-Privacy Directive.75 These are the
two main legal instruments in the EU that regulate data protection in the
information society.76 The Data Protection Directive regulates the
collection and use of personal data because employees’ expectation of
privacy in the workplace is generally high, and employees are viewed as
being in need of protection from their employer’s interference with their
privacy.77 The EU Directive on Data Protection of 1995 required member
states to pass a national privacy law and create a Data Protection Authority
to protect citizens’ privacy.78 The Directive prohibited personal information
from being collected without the consumers’ permission and also gave
consumers the right to review data about them in order to correct
inaccuracies.79 In addition, personal information is prohibited from being
shared by companies or across borders, without the express permission from
the subject of the data, and companies that process the data are required to
register their activities with the government.80
X. Other Countries
France generally prohibits an employer from reviewing an applicant’s
financial position or past convictions.81 An employer may only seek
personal data from job applicants if there is a direct and necessary
connection between the background check and the contemplated employment
relationship. Industries with a direct relationship between the job and a
candidate’s criminal history include sectors such as banking, auditing, and
defense.82 In other European countries, ex-offenders are ineligible, at least for
some period of time, from serving in positions of trust and power such as
judges, military and police officers, and high-level executive branch officials.83
75. Dimov, supra note 26.
76. Id.
77. Wugmeister, supra note 69.
78. Bob Sullivan, ‘La difference’ is stark in EU, U.S. privacy laws: Privacy Lost: EU, U.S.
laws differ greatly, NBC NEWS, Oct. 19, 2006, http://www.nbcnews.com/id/15221111/ns/te
chnology_and_science-privacy_lost/t/la-difference-stark-eu-us-privacy-laws/#.VwMitceFDzI.
79. Id.
80. Id.
81. Eric Krell, Pre-Employment Screening Agenda, Forecast for Global Background
Checks, SOCIETY FOR HUMAN RESOURCE MANAGEMENT (Mar. 19, 2016), https://www.shrm.org
/hr-today/news/hr-magazine/Pages/0413-international-background-screening.aspx.
82. Wugmeister, supra note 69.
83. Larrauri & Jacobs, supra note 25.
2017]
Background Checks & Employment Discrimination
171
Barring ex-offenders from these positions, which require honesty and integrity,
is based on a presumption that ex-offenders lack those qualities.84
In Spain, broader restrictions apply to prevent ex-offenders from
working in the public sector as teachers, doctors, university professors, or
civil servants, because there is a “widely held belief . . . that criminal
records are not an occupational requirement, except to work in the Public
Administration.”85 Many European countries have also adopted laws
mandating a criminal background investigation for individuals applying for
jobs that include working with children or elderly persons.86
If a job candidate is not barred from a position, and an employer
decides to pursue the candidate’s criminal background information, the
process which the employer would follow is not as simple as hiring a third
party vendor, like it is in the United States. First, the process to gather
criminal information in Europe typically takes longer than it does in the
United States. In the United States, a domestic background check usually
takes less than forty-eight hours to accomplish, but in the EU it can
sometimes take two weeks.87 Second, in France for example, an employer
would have to file a registration with, and obtain approval from, the
Commission Nationale de l’Informatique et des Libertés (CNIL)88 in order to
obtain the data sought from a background check. CNIL is a French
administrative regulatory agency whose task is to ensure that data privacy law
is “applied to the collection, storage, and use of personal data.”89
In Spain, employers can bypass the government background check
agency and are allowed to ask job candidates to individually obtain a copy
of their Criminal Record Certificate (Certificado de Antecedentes Penales)
from the National Criminal Register (NCR) and submit it with their job
application.90 However, some labor law scholars argue that employers
cannot ask for candidates’ criminal information because “information about
moral character is only rarely relevant to the job applicant’s ability to
perform the job for which that person is applying.”91 Aside from Spain, the
majority of EU employers only consider a background check if it is
relevant to the position for which the candidate is applying.
84. Id.
85. Id.
86. Id.
87. Krell, supra note 81.
88. Wugmeister, supra note 69.
89. Commission Nationale de l'Informatique et des Libertés –CNIL, To protect personal
data, support innovation, preserve individual liberties, https://www.cnil.fr/en/home.
90. Larrauri & Jacobs, supra note 25.
91. Id. at 14.
172
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
Consequently, if the United States mirrors the EU’s approach in
tailoring background checks to specific jobs, or even to select industries,
this will allow employers to give Americans with criminal records a second
chance at becoming productive members of society. After all, there is a
“strong interest in convicted persons successfully reintegrating into the
societal mainstream.”92
XI.
U.S. Regulations
Before suggesting certain reforms, two existing laws that attempt to
regulate preemployment screening practices need to be addressed. Those
laws are the Fair Credit Reporting Act of 1970 (FCRA)93 and Title VII of
the Civil Rights Act of 1964.94 FCRA has two primary goals: first, to
ensure that applicants are aware of and give consent to any background
check by an employer that involves credit, education, military service, or
medical records;95 and second, to permit job applicants an opportunity to
correct any misinformation contained in the report, prior to any decisions
made by the employer.96 To accomplish these goals, the FCRA protects
employees from employers using poor credit history as a hiring criterion, but
also regulates consumer credit agencies (CRA) that provide criminal
background checks to employers. FCRA mandates that employers obtain the
applicant’s permission before requesting a criminal history report from a CRA,
and obligates employers to provide a copy of that report to the applicant before
taking any negative action based on the information contained in the report.97
Despite the FCRA’s intentions, there are loopholes for employers to
bypass these requirements. If an employer conducts the background check
itself without using a CRA, the employer is not subject to the consent and
notice provisions of the Act.98 Also, an employer may refuse to hire a
candidate after seeing the background information, if it purports to base its
decision on other criteria, such as a large candidate pool with more
92. Larrauri & Jacobs, supra note 25 at 17.
93. Fair Credit Reporting Act, 15 U.S.C. § 1681 (2012).
94. See, generally, Employers, U.S. EQUAL EMPLOYMENT OPPORTUNITY COMMISSION (Apr.
7, 2016), http://www.eeoc.gov/employers/index.cfm (discussing laws that protect employees and
job applicants against employment discrimination); See also Pre-Employment Inquiries and
Arrest & Conviction, U.S. EQUAL EMPLOYMENT OPPORTUNITY COMMISSION (Apr. 8, 2016),
http://www.eeoc.gov/laws/practices/inquiries_arrest_conviction.cfm.
95. Curry, supra note 33.
96. Id.
97. Wugmeister, supra note 69.
98. Curry, supra note 33.
2017]
Background Checks & Employment Discrimination
173
qualified individuals than the applicant.
The Equal Employment Opportunity Comission (EEOC)
supplemented the FCRA’s clamp down on criminal background check
discrimination with its April 2012 issuance of the Enforcement Guidance
on the Consideration of Arrest and Conviction Records in Employment
Decisions under Title VII of the Civil Rights Act of 1964.99 The EEOC issued
the guidance because criminal background checks have a significant “disparate
impact”100 on protected classes of people including Latinos and African
Americans. As further outlined in the EEOC’s Pre-Employment Inquiries and
Arrest & Conviction guide, Title VII’s objective is to prohibit employers from
treating people differently because of their race, national origin, color, sex, or
religion. Title VII also prohibits employers from using policies or practices
that screen individuals based on criminal history, if the screening does not
help the employer accurately decide if the individual is likely to be a
responsible, reliable, or safe employee.101
The issue took center stage in the case of Equal Employment
Opportunity Commission v. BMW. In that case, the EEOC alleged that
BMW had a blanket exclusion policy that denied facility access to some of
its employees and contractors, who had certain criminal convictions, while
other similarly situated employees with no convictions were allowed.102
The EEOC also alleged that BMW did not indicate a time limit with regard
to the convictions, and it did not consider the nature or gravity of the crime,
the age of the conviction, or whether the conviction was job-relevant.103
BMW settled the case for $1.6 million.104
In a separate Title VII matter, Equal Employment Opportunity
Commission v. Freeman,105 the EEOC challenged the employer’s use of
criminal background checks in the hiring process, alleging that background
checks had a disparate impact on African-American and Hispanic job
applicants.106 In this case, finding that the EEOC failed to show a disparate
impact, the Fourth Circuit affirmed summary judgment in favor of the
99. Enforcement Guidance on the Consideration of Arrest and Conviction Records in
Employment Decisions Under Title VII of the Civil Rights Act of 1964, 42 U.S.C.
§ 2000e et. seq. (2012); Emsellem & Ziedenberg, supra note 7.
100. Id.
101. Pre-Employment Inquiries and Arrest & Conviction, supra note 94.
102. Equal Employment Opportunity Commission v. BMW Mfg. Co., L.L.C., 2015 WL
5431118, 1, No. 7:13-1583-HMH, (D.S.C. July 30, 2015).
103. Id.
104. Id.
105. Equal Employment Opportunity Commission v. Freeman, 126 F. Supp. 3d 560 (D.
Md. 2015).
106. Id.
174
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
employer.107 The opinion emphasized that by bringing actions of this
nature, the EEOC has “placed many employers in the ‘Hobson’s choice’ of
ignoring criminal history and credit background information, thus exposing
themselves to potential liability for criminal and fraudulent acts committed
by employees, on the one hand, or incurring the wrath of the EEOC for
having utilized information deemed fundamental by most employers.”108
The EEOC stated that preemployment screening should be limited to
convictions for which the exclusion is “job [or position] related” and is
consistent with a “business necessity.”109 However, the current conundrum
is that nobody knows exactly what “job-related and consistent with
business necessity” means in practical terms, because it is not clear from
any U.S. court decisions.110 The closest our courts have come to solving
the confusion was in the Dollar General, BMW, and Freeman cases.
However, we are left with no guiding case law since Dollar General and BMW
both settled, and the EEOC lost on summary judgment without ever having the
substantive discriminatory claims adjudicated in the Freeman case. At present,
regulation of employers who seek background checks, and of the companies
who serve them, is sorely lacking.
XII. An Effort to Rectify the Problem
Hope lies in the state and local agencies that are passing “fair chance”
legislation to combat employers’ discriminatory hiring practices. Fair
chance refers to an employer evaluating potential candidates based on the
merits of their qualifications, not just past criminal history. 111 Many cities
including Seattle and San Francisco have begun enforcing fair chance laws
by placing “Ban the Box” restrictions on job applications.112 In many
jurisdictions that have banned the box, an employer may not ask candidates
if they have ever been arrested or convicted of a crime. This does not mean
that an employer is forbidden from ever requesting a criminal background
107. Barry A. Hartstein, et al., Update on Criminal Background Checks: Impact of EEOC v.
Freeman and Ongoing Challenges in a Continuously Changing Legal Environment, A LITTLER
MENDELSON REPORT, 1 (Feb. 23, 2015), available at http://www.littler.com/file s/press/pdf/2015_
2_Insight_Update_Criminal_Background_Checks_Impact_EEOC_v_Freeman.pdf.
108. Id.
109. Curry, supra note 33 (noting that the EEOC has indicated conviction records could
only be used if the employer can show a business justification for the use).
110. Hartstein, supra note 107.
111. Emsellem & Ziedenberg, supra note 7.
112. Nathaniel M. Glasser, Background Checks–EEOC Seeks to Eliminate Barriers to
Recruitment and Hiring, (June 23, 2015), http://www.natlawreview.com/article/backgroundchecks-eeoc-seeks-to-eliminate-barriers-to-recruitment-and-hiring.
2017]
Background Checks & Employment Discrimination
175
check on the candidate. Instead, ban the box laws delay the criminal inquiry
until the candidate has had a chance to present his or her credentials for the job,
without the stigma of past criminal history biasing the employer’s first
impression. Once the employer decides that the candidate is qualified and
moves him or her to the next stage of the hiring process, criminal history
information becomes fair game.
While public sentiment and political forces are finally shifting in favor
of criminal justice reform,113 and although ban the box is a good first
response to the problem, it is merely a short-term solution since it only
prevents the employer from using background checks as a preliminary
screening tool. Despite this measure, employers still have access to a job
applicant’s criminal information down the road, after the applicant has first
been evaluated on the merits.
Fair chance legislation does not solve the larger policy issue of
whether criminal history should be available to an employer at all times or
only if there is a business justification (i.e., a candidate should be screened
for criminal history if he or she works with children or in a specific
industry, like the military). While the aforementioned regulatory efforts
make it more difficult for U.S. employers to conduct background checks,
the law still has a long way to go before it provides as much protection as
EU employees enjoy.114 This begs the underlying question of what
principle does the United States value more: to guard the country’s safety
by permanently tracking those accused of crimes, or to preserve its identity
as a country of second chances.115
XIII. Conclusion
In the United States, common screening practices makes it difficult for
ex-offenders to be evaluated based on their suitability for specific jobs.116
The courts provide some protection, requiring that the evaluation of an
employee’s criminal record must be tailored to a business justification, but
the courts do not explain what qualifies as sufficient justification for
denying employment. This oversight has created a regulatory gap.
The burden of proving whether employment exclusion is justified
should rest on the employer. This approach will ensure that “business
113. Emsellem & Ziedenberg, supra note 7.
114. U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis,
supra note 6.
115. Graham, supra note 10.
116. Fleshler, supra note 1.
176
Hastings Int’l & Comp. L. Rev.
[Vol. 40:1
justification” is interpreted narrowly, to justify exclusion only to prevent a
serious and immediate threat to public safety. A strong business
justification rule will prevent blanket employment exclusion of candidates
with criminal records from certain industries, as currently occurs in Spain.
The rule will also prevent employers from rejecting qualified applicants
from positions that are not relevant to the candidates’ criminal history.
Consequently, in the earlier example of the dairy farmer, his employer
would have no legal or business justification to exclude him solely based
on an arrest for failure to pay child support.
Lastly, to mitigate the harms caused by flawed background checks,
their needs to be more regulation on the background screening companies.
The screening industry is worth billions of dollars and the companies
performing the checks are profiting. Meanwhile, individuals who are bogged
down by poverty and unemployment are suffering from the errors contained in
their reports. The FCRA must enforce a policy that mandates those companies
to advance additional due diligence processes in order to double check the
disposition of an applicant’s criminal history prior to divulging information to
employers. Had Sterling Infosystems performed this due diligence, Kevin A.
Jones would not have been mixed up with Kevin M. Jones, and his job as a
doorman would not have been rescinded.
Hastings West-Northwest Journal of
Environmental Law and Policy
University of California, Hastings College of the Law
From WNW Volume 19, Number 2:
The “Fair Share” Concept in Takings Law
— Joseph L. Sax
From WNW Volume 20, Number 2:
Anti-monopoly and the Radical Lockean Origins of Western
Water Law
— Michael C. Bloom
The Draft Bay Delta Conservation Plan: Assessment of Environmental Performance and Governance
— Jeffrey Mount, William Fleenor, Brian Gray, Bruce Herbold, and
Wimm Kimmerer
From WNW Volume 21, Number 1:
Getting to Zero: A Roadmap to Energy Transformation in
California Under the Clean Air Act
— Paul Cort
The Definitive Guide to Tree Disputes in California
— Ellis Raskin
West-Northwest publishes twice a year, winter and
spring, exclusively online:
http://journals.uchastings.edu/journals/websites/
west-northwest/index.php
Hastings West-Northwest Journal
of Environmental Law and Policy
University of California
Hastings College of the Law
200 McAllister Street
San Francisco, CA 94102
Telephone: 415-581-8966
email: [email protected]
Hastings West-Northwest Journal of
Environmental Law and Policy’s
ANTHOLOGY
THE VERY BEST IN ENVIRONENTAL LAW SCHOLARSHIP FROM
WEST-NORTHWEST
VOLUME 1 THROUGH VOLUME 13
INCLUDING:
Understanding Transfers: Community Rights and the Privatization of Water, article
by Joseph Sax
Natural Community Conservation Planning: A Targeted Approach to Endangered
Species Conservation, article by Steve Johnson
The Federal Role in Managing the Nation’s Groundwater, artcile by John D. Leshy
The Shape of Things to Come: A Model Water Transfer Act for California, article by
Brian E. Gray
Water Markets and the Cost of Improving Water Quality in the San Francisco Bay/
Delta Estuary, article by David Sunding, David Zilbermann, and Neal
MacDougall
Global Climate Change: Water Supply Risks and Water Management Opportunities,
article by Brian E. Gray
Climate Change and the Law of the River- A Southern Nevada Perspective, article by
Patricia Mulroy
WEST-NORTHWEST’S “GREATEST HITS”
AT THE SPECIAL, LIMITED-TIME-ONLY PRICE OF $15.00
TO ORDER A COPY OF
PLEASE SEND YOUR NAME AND MAILING ADDRESS TO
[email protected]
Hastings College of the Law:
The First Century
1878 - 1978
by Thomas Garden Barnes
This centennial celebration
of Hastings College of the
Law, published in 1978 at the
100th anniversary of the college, tracing the development
of an extraordinary instituttion, born in pre-Gold Rush
San Francisco,. It is the story
of a maverick law school and
of the distinctive personalities
who have driven its long and
colorful history.
Hardcover, US$10.00 including shipping and handling.
To order: https://mercury.uchastings.edu/secured/pubscommerce/cgi-bin/commerce.cgi?listcategories
For more information:
[email protected]
SELECTED WRITINGS OF
ROGER J. TRAYNOR
Chief Justice Traynor of the California Supreme Court was
acclaimed by scholars everywhere as eminently deserving the American Bar Association’s gold medal award, which described him as “one
of the great judges in United States history.” Justice Traynor left a
legacy of papers and memorabilia to Hastings College of the Law as a
nucleus for new scholarship, and the first public collection of Traynor
material opened at Hastings in October 1987.
A great teacher as well as a great jurist, Justice Traynor wrote a
number of essays on law and the judicial process. Hastings Law Journal takes pride in presenting this special collection of Traynor writings.
Five hundred numbered hardbound copies of this sampling of
Traynor writings are available, as well as softbound copies. To order
your copies please mail the following form to:
O’Brien Center for Scholarly Publications
Hastings College of the Law
200 McAllister Street
San Francisco, CA 94102-4978
Phone: (415) 581-8950
FAX: (415) 581-8994
Name
Address
City
State
Zip
Number of copies requested:
Numbered hardbound
Softbound
———
———
at $30.00 each
at $18.00 each
Enclosed is my check in the amount of $———
HASTINGS
SCIENCE AND
TECHNOLOGY LAW
JOURNAL
R
ECOGNITION OF THE IMPORTANCE OF THE RELA
TIONSHIP BETWEEN SCIENCE AND TECHNOLOGY
AND THE LAW, AND THE BENEFITS TO BE DERIVED
FROM EXPLORING THE DEVELOPMENT OF THIS AREA OF
LAW, has prompted the genesis of the Hastings Science and
Technology Law Journal. Among the diverse subjects to which
the Journal will address itself are the legal issues concerning
science, scientific methodology, technology, biotechnology, bioethics, patents, trade secrets, and health.
Our goal is twofold: first, to provide legal practitioners, judges,
policy makers, scientists and engineers with intellectually stimulating and scholarly material concerning current issues in the
field; and sec-ond, to introduce students to the array of unique
issues presented in the nexus of law, science and technology.
WE INVITE SUBMISSIONS OF ARTICLES,
COMMENTARIES, AND PAPERS.
Hastings Science and Technology Law Journal
UC Hastings College of the Law
200 McAllister Street
San Francisco, CA 94102-4978
[email protected]
Hastings Science and Technology Law Journal publishes
exclusively online: http://journals.uchastings.edu/journals/
websites/science-technology/index.php.
Forging Rivals:
Race, Class, Law and the
Collapse of Postwar Liberalism
by Reuel Schiller
UC Hastings
Professor of Law
Honorable Mention,
2016 J. Willard Hurst
Award, Law and
Society Association
From Cambridge University Press
Part of Cambridge Historical Studies in American Law and Society
Order from: http://www.cambridge.org
University of California Hastings College of the Law
Essays on the law and work of Roger Traynor -- published by UC
Hastings College of the Law, 2015.
To order: [email protected]
Founded in 1989, Hastings Women’s Law Journal is committed to advancing
feminist perspectives and promoting scholarship in issues of concern common
to all women, while recognizing the unique concerns of communities that
traditionally have been denied a voice, such as women of under-represented
populations. Published twice per year.
CURRENT ISSUE:
WINTER 2017 • VOLUME 28 • ISSUE 1
ARTICLES
Katlyn Brady, Revenge in Modern Times: The Necessity of a Federal
Law Criminalizing Revenge Porn, 28 HASTINGS WOMEN’S L.J. 3
Dana Pugach and Michal Tamir, Nudging the Criminal Justice System
into Listening to Crime Victims in Plea Agreements, 28 HASTINGS
WOMEN’S L.J. 45
Avishalom Westreich, Changing Motherhood Paradigms: Jewish Law,
Civil Law, and Society, 28 HASTINGS WOMEN’S L.J. 97
PERSONAL NARRATIVE & LETTERS
Jennifer Twist and Merienne Star Blake, The Principal Theory,
28 HASTINGS WOMEN’S L.J. 73
NOTES
Brooke Acevedo, The Constitutionality and Future of Sex Reassignment Surgery in United States Prisons, 28 HASTINGS WOMEN’S L.J. 81
Alice Kwak, Medical Marijuana and Child Custody: The Need to
Protect Patients and their Families from Discrimination,
28 HASTINGS WOMEN’S L.J. 119
Anne Onoma, Legal Censure of Unconventional Expressions of Love
and Sexuality; Finding a Place in the Law for BDSM,
28 HASTINGS WOMEN’S L.J. 25
Hastings Women’s Law Journal
University of California Hastings College of the Law
200 McAllister Street, San Francisco, CA 94102
[email protected]
hastingswomenslj.org
The Hastings Race and Poverty Law Journal
is committed to promoting and
inspiring discourse in the legal
community regarding issues of
race, poverty, social justice, and
the law.
This Journal is committed to
addressing disparities in the
legal system.
We will create an avenue for
compelling dialogue on the subject
of the growing marginalization of
racial minorities and the economically disadvantaged.
It is our hope that the legal theories addressed in
this Journal will prove useful in remedying the
structural inequalities facing our communities.
The Hastings Race and Poverty Law Journal is published twice
per year: Fall and Spring exclusively online:
http://journals.uchastings.edu/journals/websites/race-poverty/
index.php.
Hastings Race & Poverty Law Journal
University of California
Hastings College of the Law
200 McAllister Street
San Francisco, CA 94102-4978
(415) 581-8953
email: [email protected]
HASTINGS LAW JOURNAL
UNIVERSITY OF CALIFORNIA HASTINGS COLLEGE OF THE LAW
Recent and Forthcoming
Recent: Vol. 67, No. 2
Articles
California Constitutional Law: The
Right to an Adequate Education
by Anne D. Gordon
Inconsistency and Angst in District
Court Resolution of Social Security
Disability Appeals
by Harold J. Krent & Scott Morris
Remedial Clauses: The
Overprivatization of Private Law
by Seana Valentine Shiffrin
Network Equality
by Olivier Sylvain
Notes
Beyond Control and Without Fault
or Negligence: Why Japan Should
bBe Excused from Meeting Its
Kyoto Protocol Obligations
by Regina Durr
Sex Trafficking Legislation Under
the Scope of the Harm Principle and
Moral Panic
by Lesley Rae Hamilton
Forthcoming: Vol. 67, No. 4
Articles
Does Antidiscrimination Law
Influence Religious Behavior?
Empirical Evidence and Policy
Implications
by Netta Barak-Corren
Legal Indeterminacy in Insanity
Cases: Clarifying Wrongfulness and
Applying a Triadic Approach to
Forensic Evaluations
by Kate E. Bloch & Jeffrey Gould
Understanding Validity in Empirical
Legal Research: The Case for
Methodological Pluralism in
Assessing the Impact of Science in
Court
by Teneille Brown, James Tabery &
Lisa G. Aspinwall
Sufficiently Safeguarded?:
Competency Evaluations of Mentally
Ill Respondents in Removal
Proceedings
by Sarah Sherman-Stokes
Notes
ACOs and Consolidation Under the
Medicare Shared Savings Program:
Leveraging MSSP Eligibility to
Address Pricing Power
by Michael Montgomery
Matter of A-R-C-G: A Game
Changer for Children Seeking
Asylum on the Basis of Intrafamilial
Violence
by Sarah Winfield
HASTINGS INTERNATIONAL
AND COMPARATIVE LAW Review
Out Now: Volume 35, Number 2, Summer 2012:
The Rule of Law in Outer Space: The Effects of Treaties and
Nonbinding Agreements on International Space Law By Brian
Wessel
International Law and Limitations on the Exercise of Extraterritorial
Jurisdiction in U.S. Domestic Law By Dan Stigall
Recent Articles and Commentary:
Applying the Doctrine of Superior Responsibility to Corporate
Officers: A Theory of Individual Liability for International Human
Rights Violations
By Brian Seth Parker
Transforming Accountability: A Proposal for Reconsidering How
Human Rights Obligations Are Applied to Private Military Security
Firms
By Lauren Groth
The Nonjusticiability of Palestine: Human Rights Litigation and the
(Mis)application of the Political Question Doctrine By Gwynne
Skinner
Litigating “Palestine” Before International Courts and Tribunals: The
Prospects of Success and Perils of Failure By Victor Kattan
Hastings International and Comparative Law Review
is now publishing exclusively online at:
http://journals.uchastings.edu/journals/websites/international-comparative/index.php
UC Hastings College of the Law
HASTINGS
BUSINESS
LAW Journal
Current Issue:
Summer 2015
Volume 7
Articles
Access to United States Courts by
Purchasers of Foreign Listed Securities in
the Aftermath of Morrison v. Australia
National Bank Ltd.
- Roger W. Kirby
Comment
Paying for Daniel Webster: Critiquing
the Contract Model of Advancement of
Legal Fees in Criminal Proceedings
- Regina Robson
Student Notes
Towards a Stakeholder-Shareholder
Theory of Corporate Governance: A
Comparative Analysis
- Katherine V. Jackson
No. 2
An Unstoppable Force: The Offshore
World in a Modern Global Economy
- Michael J. Burns & James
McConvill
Webcaster II: A Case Study of
Business to Business Rate Setting by
Formal Rulemaking
- Andrew D. Stephenson
Protecting Title in Continental Europe
and the United States – Restriction of
a Market
- Peter Soskin
Article Submissions
Submissions may be in Microsoft Word format or printed double-spaced, with
footnotes at the end of the article. Citations should conform to The Bluebook: A
Uniform System of Citation (20th ed. 2015). Please send articles by regular mail
(see address below) or by email to [email protected].
O’Brien Center for Scholarly Publications
University of California, Hastings College of the Law
200 McAllister Street
San Francisco, CA 94102
Email: [email protected]
Hastings Business Law Journal publishes exclusively online:
http://journals.uchastings.edu/journals/websites/business/index.php
COMM/ENT
HASTINGS COMMUNCATIONS
AND ENTERTAINMENT LAW JOURNAL
Current in Volume 39 Number 1:
ARTICLE
DROIT DE SUITE, COPYRIGHT’S FIRST SALE DOCTRINE AND
PREEMPTION OF STATE LAW
by David E. Shipley
NOTES
#NCAA VS. STUDENT ATHLETES: AN EMPERICAL ANALYSIS
OF NCAA SOCIAL MEDIA POLICIES
by Elizabeth M. Heintzelman
CAN I PLAY TOO? TRANSGENDER STUDENT ATHLETE’S IN“BECAUSE OF SEX”
CLUSION IN
by Paul Jones
Publishing exclusively online at
http://journals.uchastings.edu/journals/websites/communicationsentertainment/index.php
O’Brien Center for Scholarly Publications
University of California
Hastings College of the Law
200 McAllister Street
San Francisco, CA 94102-4978
HASTINGS
CONSTITUTIONAL LAW
QUARTERLY
Recent and Notable Articles
Articles
Peggy M. Tobolowsky, Different Path Taken: Texas Capital
Offenders’Post-Atkins Claims of Mental Retardation
CLQ Volume 39
Peter Nicholas, “I’m Dying to Tell You What Happened”:
The Admissibilityof Testimonial Dying Declarations
Post-Crawford
CLQ Volume 37
David Shelledy, Autonomy, Debate, and Corporate Speech
CLQ Volume 18
Daniel Mandelker, Land Use Takings:
The Compensation Issue
CLQ Volume 8
Notes
Ameet Kaur Nagra, A Higher Protection for Scholars Faced with
Defamation Suits
CLQ Volume 41
Debra Burns, Too Big to Fail and Too Big to Pay: States, Their
Public-Pension Bills, and the Constitution
CLQ Volume 39
David T. Gibson, Spreading the Wealth: Is Asset Forfeiture the Key to
Enticing Local Agencies to Enforce Federal Drug Laws?
CLQ Volume 39
Hastings Constitutional Law Quarterly
UC Hastings College of the Law
200 McAllister Street
San Francisco, CA 94102-4978
[email protected]
Subscription price:
$70 per year/US $80 foreign