The UK government has lost its case against the European Securities and Markets Authority (ESMA) over its right to ban short selling in individual member states.
ESMA’s current batch of regulation over short selling gave it the right to ban the practice if it felt financial stability in the European Union was at stake.
However, the UK felt the regulator had been given too much leeway with regards to intervention, and that this was at odds with the EU’s principles on the delegation of powers.
Taking the case to the European Court of Justice (ECJ), it said ESMA’s discretion was too political in nature.
The government also argued ESMA’s aim to harmonise financial stability measures across member states was not the correct legal basis to grant it powers of intervention.
However, the court dismissed this argument and said ESMA’s ability to intervene did not exceed its original authority.
It also argued that enough safeguards were in place to limit its power.
With regards to the regulator’s discretion, the ECJ pointed out the authority was already controlled by various limiting conditions and criteria.
It pointed out that ESMA could only intervene in markets if there were a threat to cross-border stability, and if “no competent national authority had taken measures to address the threat”.
Furthermore, the court said ESMA was already required to ensure its measures addressed the threat directly, and did not create the risk of regulatory arbitrage or have a detrimental effect on financial market efficiency.
The court added: “The powers available to ESMA are precisely delineated and amenable to judicial review in the light of the objectives established by the authority that delegated those powers to it.”
It also said the provision in EU law that allows its decision-making powers could not be argued against in isolation, as the UK had done.
It said the provision must be considered with all the rules designed to ensure financial stability and market confidence.
Both ESMA and the European Commission welcomed the ruling.
A spokesperson for HM Treasury, which took the case to the ECJ, said it was disappointed in the judgment, which saw the ECJ go against its Advocate General.
In his opinion in September, the Advocate General – the court’s highest adviser – backed the UK government and said ESMA’s powers went beyond what could be adopted to achieve stability.
The spokesperson added: “We’ve consistently said we want tough financial regulation that works. But any powers conferred on EU agencies must be consistent with the EU treaties and ensure legal certainty. We will now consider the judgment in detail and respond, in full, at a later date.”
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