Commission communication — Intra-EU investment in the financial services' sector
Date: 2005-11-25
Institutions: European Commission
Subjects: EU law - national law, direct investment, financial institution, free movement of capital, interpretation of the law, investment policy, regulation of investments

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COMMISSION COMMUNICATION

Intra-EU investment in the financial services' sector

(2005/C 293/02)

1. INTRODUCTION

The lack of cross-border consolidation in the financial sector was highlighted by Finance
Ministers at the informal ECOFIN Council of 10-11 September 2004 at Scheveningen.
The situation varies across Member States and there is some concern that obstacles
which are incompatible with Treaty freedoms may exist.

Financial sector consolida-
lagging behind,
tion is
to
obstacles
suggesting
investment.

The provisions of Articles 56 and 43 of the Treaty on the freedom of capital movements
and the right of establishment are directly applicable in the context of intra-EU (1) direct
investment in the financial sector (2). Recent rulings by the European Court of Justice
(ECJ) on direct investment have advanced the understanding of those principles.

The Treaty freedoms grant
basic
and wide-ranging
rights …

These ECJ rulings have also given a strict interpretation of possible exceptions to the
Treaty freedoms, notably of those exceptions related to general interest and prudential
considerations, which are the most relevant for the financial sector.

… with limited excep-
tions.

The fundamental Treaty principles of free movement of capital and the right of establish-
ment impact on the detailed framework set out in secondary legislation for the financial
sector. Where Member States, as is legitimate in the framework of subsidiarity, adopt
supplementary rules beyond those outlined in secondary legislation, those rules and prac-
tices must be compatible with general Treaty principles.

In particular, it is of the utmost importance for the completion of the internal market
that discretionary powers available to supervisory authorities in matters relating to
authorisation and supervision of financial intermediaries are used exclusively to protect
the interest
for which they were foreseen. Otherwise compatibility problems with
primary EC law may arise.

Overriding Treaty princi-
ples and ECJ case law have
to be borne in mind.

This Communication aims to reduce the risk of divergent legal interpretation in this
area. Thus, on the one hand, it will give Member States an opportunity to refine, where
necessary, their laws and administrative behaviour. On the other hand, it aims to make
financial institutions fully aware of their rights stemming from the Treaty in the area of
intra-EU direct investment. In no way does it presume that such risks exist across the
EU, nor does it prejudge the interpretation that could be given by the European Court of
Justice.

The aim of this communi-
cation is to outline rights
and obligations.

2. THE FUNDAMENTAL TREATY PRINCIPLES

The relevant Treaty provisions governing the freedom of capital movements are
enshrined in Articles 56 to 60 of the EC Treaty. In particular, Article 56 of the Treaty
provides that ‘all restrictions on the movement of capital between Member States shall
be prohibited’.

The Treaty provides for
total
freedom of capital
movements.

Direct investment in the form of participation in an undertaking by means of a share-
holding, or the acquisition of securities on the capital market, constitute capital move-
ments for the purposes of Article 56 of the Treaty. Direct investment is characterised, in
particular, by the possibility of participating effectively in the management of a company
or in its control (3). Certain national rules limit this possibility and have consequently
been identified as restrictions to the freedom of capital movement: rules limiting the
acquisition of shareholdings (4) or restricting in some other way the scope for partici-
pating effectively in the management of a company or in its control (5), furthermore
rules that are liable to deter investors of other Member States and consequently affect
access to the market (6) or that make a direct foreign investment subject to prior authori-
sation (7). Article 56 of the Treaty goes beyond the mere elimination of unequal treat-
ment on grounds of nationality (8).

It clearly covers all forms
of
intra-EU cross border
investment.

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The acquisition of controlling stakes in a domestic company by an EU investor from
another Member State, in addition to being a form of capital movement, is also covered
by the right of establishment. Article 43 of the Treaty, governing the right of establish-
ment, provides that ‘restrictions on the freedom of establishment of nationals of a
Member State in the territory of another Member State shall be prohibited… Freedom of
establishment shall
include the right to set up and manage undertakings, under the
conditions laid down for its own nationals’. Thus, nationals of other EU Member States
should be free to acquire controlling stakes, exercise voting rights and manage domestic
companies under the same conditions laid down in a given Member State for its own
nationals (i.e. the application of the ‘national treatment’ principle to other EU investors).

of

acquisition

The
a
controlling stake by an EU
investor is also covered
by the right of establish-
ment.

With respect to intra-EU investment in the financial services' sector, both Treaty free-
doms apply in parallel in cases of direct investment, whereas for portfolio investment, it
is the freedom of capital movements that applies. For the purposes of the present
Communication, a separate examination of the measures at issue in the light of the
Treaty rules concerning freedom of establishment is consequently not called for and it is
sufficient to focus on the freedom of capital movements, Article 56 EC.

In these cases establish-
ment
inextricably
linked to capital move-
ments.

is

3. SPECIFIC EXCEPTIONS PROVIDED FOR IN THE TREATY OR BY ECJ CASE LAW

Exceptions allow Member States to introduce restrictions to general Treaty rules. They
are expressly mentioned in Treaty provisions or have been admitted by the European
Court of Justice on the basis of the Treaty. The free movement of capital, as a funda-
mental principle of the Treaty, may be restricted in two respects only: by Community or
national rules which are justified by exceptions contained expressly in the Treaty (9) or
by overriding requirements of the general interest developed by the ECJ on the basis of
the Treaty (10).

Restrictions to the free-
doms may be possible …

…on prudential grounds…

Article 58(1)(b) of the Treaty contains a specific Treaty carve-out referring to prudential
measures. It permits Member States ‘to take all requisite measures to prevent infringe-
ments of national law and regulations, in particular in the field of … the prudential
supervision of financial institutions’.

Article 58(2) also permits the application of restrictions on establishment which are
compatible with the Treaty (11).

Article 58(3), nevertheless, affirms that all these exceptions shall not constitute a means
of arbitrary discrimination or a disguised restriction on the free movement of capital. So,
while prudential supervision is a specific exception to the freedoms, it is circumscribed
by the same qualifications applicable to other restrictions. These are outlined below as
overriding Treaty principles.

For example, regarding cooperatives, Member States can establish national provisions
allowing their supervisory authorities to oppose a cross-border merger when forming a
European Cooperative Society. Such opposition in the context of prudential supervision
in the sense of Article 58(1)(b), however, can only be based on grounds of public interest.
In order to justify such public interest considerations in the light of Article 58(3),
national supervisory authorities should ensure that these institutions with a particular
statute always act fully in accordance with that statute.

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With respect to overriding requirements of the general interest as justification for restric-
tions on the free movement of capital, it needs to be stressed that existing case law is
limited and gives little positive guidance as to this wide ranging concept:

… or on the basis of
general
require-
interest
ments

Among the few overriding requirements that have been found by the European Court of
Justice to justify restrictions one can find the protection of consumers (12).

It is settled case-law, however, that economic grounds can not serve as justification for
obstacles prohibited by the Treaty (13). In cases decided by the European Court of Justice,
Member States have unsuccessfully (14) argued e.g. the need to safeguard the financial
interest of a Member State (15) or the intention to promote the economy of
the
country (16). With respect to the provision of services, the Court has recently clarified
that a commercial bank does not qualify as a public service provider: it ruled that a
group of commercial banks which operate in the traditional banking sector and which
are not claimed to carry out any of the functions of a central bank or similar body, are
not undertakings whose objective is to provide public services (17).

4. SECONDARY LEGISLATION ON PRUDENTIAL SUPERVISION

In the area of prudential supervision, EU secondary legislation (18) has established a
number of core principles to ensure the probity and soundness of financial institutions.
These include compliance with the ‘fit and proper’ requirement and the solvency require-
ments. These core principles are essential to a secure and dynamic EU financial sector.

Directives cover the core
principles of supervision
…

EU secondary legislation, however, has not gone beyond a certain degree of harmoniza-
tion of the specific relevant provisions. It, therefore, enables Member States to apply
supplementary rules and administrative practices to the common rules set down in EU
directives.

… and ensure a certain
degree of harmonisation.

But when national rules are more restrictive than EU secondary legislation, conflicts with
the Treaty freedoms may appear. Essentially, those national rules may involve more
restrictive determinations of the soundness of financial institutions, approval thresholds
and administrative procedures. When legislating or creating or enforcing administrative
practices, Member States must respect both, the basic freedoms guaranteed by the EC
Treaty in addition to ensuring compliance with the directive (19).

5. THE OVERRIDING TREATY LIMITS

Supplementary
measures
and
must
Treaty.

still

national
practices
the

respect

Member States must exercise their powers in prudential regulation consistent with funda-
mental Treaty principles (20). Although EU secondary legislation permits various authori-
sation requirements for legitimate purposes and permits Member States to impose addi-
tional requirements, the ultimate control still lies with the European Court of Justice in
the light of the Treaty freedoms in Articles 56 and 43.

Ultimate control here lies
with the European Court
of Justice.

In this context it should be recalled that any exceptions to the Treaty rights of the free
movement of capital and the freedom of establishment must be interpreted restrictively
and their scope cannot be determined unilaterally by the Member States without any
control by the Community institutions (21). Thus, while prudential considerations are
specifically mentioned as possible exceptions to the freedom, they, along with other
exceptions, are circumscribed by the same qualifications that condition other restrictions.

Exceptions to Treaty free-
doms
construed
are
narrowly by the Court.

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Measures liable to hinder or make less attractive the exercise of fundamental Treaty free-
doms must fulfil four conditions (22):

Any restrictions must be:

— they must be applied in a non-discriminatory manner;
— they must be justified by imperative requirements in the general interest;
— they must be suitable for securing the attainment of the objective which they pursue;

and

— they must not go beyond what is necessary in order to attain it.

— non-discriminatory

Article 56 of the Treaty goes beyond the mere elimination of unequal treatment on
grounds of nationality (23). In this context, Article 58(3) expressly states that the excep-
tions to Article 56 shall not constitute a means of arbitrary discrimination or a disguised
restriction on the free movement of capital.

In the case of cross-border investment in the financial sector, EU secondary legislation
clearly recognises the prudential supervision needs of the supervisor of the target institu-
tion (24). But these have to be applied in the light of the prohibition of arbitrary discrimi-
nation or a disguised restriction stipulated in Article 58(3) EC. However, none of these
qualifications should be insurmountable tasks for any EU financial institution, which is
already subject to similar requirements in its home country, and wishes to acquire a
institution in another Member
participation (controlling or otherwise)
State.

in a financial

In order to be proportionate, national legislation must be suitable for securing the objec-
tive which it pursues and must not go beyond what is necessary in order to attain it (25).

— Suitable and propor-

tionate

With respect to the latter aspect (‘what is necessary to attain the objective’), according to
ECJ case law, a system of prior administrative approval (26) is only proportionate to the
aim pursued if the same objective could not be attained by less restrictive measures, in
particular a system of declarations ex post facto (27). Regarding ex-ante approval systems
in the prudential area, these considerations are relevant with respect to the burden of the
procedures involved (e.g. formalities of the application: deadlines and delays applicable,
degree of quantity and quality of information required as well as documents to be
provided) and the time taken to get such an authorisation given that these vary consider-
ably across Member States.

To obtain legal certainty a system of prior administrative approval must be based on
objective, non-discriminatory criteria which are known in advance to the undertakings
concerned, and all persons affected by a restrictive measure of that type must have a
legal remedy available to them (28). This requires e.g. that reasons be given for the refusal
of an application that are concrete enough to allow for a court to come to a decision on
their legality and correct application. Also, any imprecise or undefined criteria must be
regarded as contrary to the principle of legal certainty because imprecision prevents indi-
viduals taking full advantage of their rights deriving from Article 56 of the Treaty (29).

— Provide legal certainty

— Follow

transparent

procedures

With respect to authorisation procedures, investors need to be given clear indication of
the specific, objective circumstances in which prior approval will be granted or with-
held (30). Investors need to be aware of the criteria applicable to the authorisation deci-
sion and, independent of the degree of formality this decision may take, they need to
receive the information necessary to comprehend on which basis it has been taken.

In the financial sector, it is a well established, legitimate and useful practice for supervi-
sors to nurture informal contacts with financial institutions operating in their country.
But it is a requirement that all decisions be subject to judicial review and therefore objec-
tively motivated (31). The transparency required is lacking where oral advice of the autho-
rities not to apply for approval in cases of cross-border investment is used as a substitute
for a documented refusal of authorisation which could be subject to judicial review and
such a practice is neither in conformity with the wording, or the spirit, of Community
regulation.

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6. FURTHER COMMISSION STEPS TO FACILITATE CROSS-BORDER CONSOLIDATION

There is a need to make authorisation procedures clearer and more transparent. The
Commission is working together with Member State authorities at all levels in order to
achieve the necessary consensus around the degree of cooperation and detail that should
underpin such authorisation procedures. The Commission will come up with proposals
on the revision of Article 16 of the Consolidated Banking Directive 2000/12/EC in the
first half of 2006. The corresponding provisions in Article 15 of the Insurance Directives
(2002/83/EC and 92/49/EEC) are being examined within the framework of the Solvency
II project.

areas,
on

early
In parallel
more
agreement
precise
and transparent
supervisory approval rules
for major shareholdings is
imperative.

Moreover the Commission is carrying out an open consultation with Member States and
the financial sector in order to identify other possible obstacles beyond those linked to
prudential supervision that could hinder cross border consolidation in the EU financial
sector. It may make proposals on the elimination of such obstacles where appropriate at
a later date.

There is a need to review
wider obstacles to finan-
cial consolidation.

Where the Commission identifies breaches of Community law in respect to direct invest-
ment by EU financial institutions, it will, where sufficient evidence is available, pursue
infringement cases vigorously, as it has already done in other areas of barriers to intra-
EU direct investment.

The Commission will chal-
lenge any breaches of the
EU freedoms …

Finally, the Commission has launched sectoral competition enquiries into retail financial
services and insurance. The objective is to enhance competition in these markets. Special
attention will be given to the identification of obstacles to the provision of cross-border
services and entry barriers, both in the form of regulation as well as more ‘typical’ anti-
trust issues.

… and is also investigating
competition in the retail
financial markets.

7. CONCLUSIONS

This Communication aims to remind Member States of the relevant basic Treaty free-
doms in the area of cross-border investment in financial institutions and the requirement
for strict proportionality in any restrictions to these freedoms which might be necessary
to protect imperative requirements in the general interest. It also emphasises the need for
full transparency in all such decisions. It encourages financial institutions to document
instances of what they may consider as unjustified barriers to the integration process. In
the light of the considerations developed above, the Commission will enter into a conti-
nuing dialogue with Member States in order to identify obstacles to the free movement
of capital as well as the freedom of establishment in the financial sector. The Commis-
sion is currently working with stakeholders to refine EU secondary legislation in the
area, as well as investigating other barriers which may exist and discourage integration.
It will ensure that the fundamental freedoms of the Treaty can be realised in a harmo-
nious manner in this area.

A more transparent approach to the process of mergers and acquisitions in the financial
sector will enable financial
institutions to be fully aware of any particular legitimate
concern of national supervisors. It will also enable them to address in full all legitimate
prudential and competition concerns and thereby take full advantage of the freedoms
guaranteed by the Treaty.

(1)

(2)

In this Communication, references to EU apply equally to the European Economic Area since very similar provisions and secondary
legislation apply under the EEA Agreement
The main issue in question is not that of the level of EU ownership of shares (i.e. portfolio investment) but, the often more sensitive
issue of, foreign ownership and control (i.e. direct investment) of financial institutions

(3) Although the Treaty does not define ‘movements of capital’, it is settled case-law of the ECJ that Directive 88/361/EEC of 24.6.1988
(OJ 1988 L 178, p. 5), together with the nomenclature annexed to it (in particular Points I and III in the nomenclature in Annex I
and the explanatory notes in that annex) may be used to define the term capital movement. See rulings of 4.6.2002, Commission v
Portugal, C-367/98, ECR 2002, p. I-4731, §37; Commission v France, C-483/99, ECR 2002, p. I-4781, §36 and Commission v
I-4809, §37 (henceforth referred to as COM v Portugal/France/Belgium) and rulings of
Belgium, C-503/99, ECR 2002, p.
13.5.2003, Commission v Spain, C-463/00, ECR 2003, p. I-4581, §52 and Commission v UK, C-98/01, ECR 2003, p. I-4641, § 39
(henceforth referred to as COM v Spain/UK) as well as ruling of 16.3.1999, Trummer & Mayer, C-222/97, ECR 1999, p. I-1661,
§§20, 21.

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(4)
(5)
(6)
(7)

(8)

(9)

Ruling in COM v Spain, C-463/00, §57 and COM v UK, C-98/01, §44
Ruling in COM v UK, C-98/01, §44
Rulings in COM v Spain, C-463/00, § 61 and COM v UK, C-98/01, § 47
Ruling of 26.9.2000, Commission v Belgium, C-478/98, ECR 2000, p. I-7587, § 18, ruling of 14.12.1995, Sanz de Lera and others,
joined cases C-163/94, C-165/94 & C-250/94, ECR 1995, p. I-4821, §24 & 25, ruling of 14.3.2000, Église de Scientologie, C-54/99,
ECR 2000, p. I-1335, §14 and ruling of 1.6.1999, Konle, C-302/97, ECR 1999, p. I-3099, § 39
Rulings in COM v Spain, C-463/00, §56, COM v UK, C-98/01, §43, COM v Portugal, C-367/98, §44 and COM v France, C-483/99,
§40
E.g. Article 58 (1) of the Treaty or other specific exceptions provided for elsewhere in the Treaty, e.g. Article 296 (specific defence
sectors).

(10) Rulings in COM v Portugal, C-367/98, §49, COM v France, C-483/99, § 45, COM v Belgium, C-503/99, § 45 and COM v Spain, C-

(11)

463/00, §68
In this context, the Takeover Directive in its recital 1 points at Article 44(2)(g) of the Treaty stipulating the Council's and Commis-
sion's mandate to coordinate ‘to the necessary extent the safeguards which … are required by Member States of companies or firms
…with a view to making such safeguards equivalent throughout the Community …’.

(12) Ruling in Caixa-Bank France v Ministère de l'Economie, C-442/02, §21, where, however, the ECJ found that ‘the prohibition at issue in

the main proceedings…constitutes a measure which goes beyond what is necessary to attain that objective.’

(13) Ruling in COM v Portugal, C-367/98, §52 and, as regards the free movement of goods, ruling of 9.12.1997, Commission v France,
C-265/95, ECR 1997, p. I-6959, §62, and, in relation to freedom to provide services judgment of 5.6.1997, SETTG, C-398/95, ECR
1997, p. I-3091, §23.
It is with waning success that Member States refer to the need to ensure the cohesion of their national tax systems: see on the one
hand ruling in C-204/90, Bachmann v Belgium, [1992] ECR I-249, §28 for the field of pensions and life assurance, which has been
followed by judgments denying such justification, e.g. ruling in C-35/98, Verkooijen, §56

(14)

(15) Ruling in COM v Portugal, C-367/98, §52.
(16) Ruling in C-35/98, Verkooijen, §47
(17) Ruling in COM v Spain, C-463/00, §70.
(18) Directive 2000/12/EC of the European Parliament and of the Council of 20.3.2000 relating to the taking up and pursuit of the busi-
ness of credit institutions, Directive 2002/83/EC of the European Parliament and of the Council of 5.11.2002 concerning life assur-
ance and Second Council Directive 88/357/EEC of 22.6.1988 on the coordination of laws, regulations and administrative provisions
relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of freedom to
provide services and amending Directive 73/239/EEC
Joined cases C-193/97 & 194/97, De Castro Freitas and Escallier, §23. In this respect, e.g. the Consolidated Banking Directive (2000/
12/EC of 20.3.2000 relating to the taking up and pursuit of the business of credit institutions, OJ L 126, 26.5.2000, p. 1, here:
recital 18) explicitly states that ‘there is a necessary link between the objective of this Directive and the liberalisation of capital
movements being brought about by other Community legislation. In any case the measures regarding the liberalisation of banking
services must be in harmony with the measures liberalising capital movements.’ Article 21(4) of the Merger Regulation of
20.1.2004, OJ L 24, 29.1.2004, p. 1 ff stipulates that ‘Member States may take appropriate measures to protect legitimate interests
other than those taken into consideration by this Regulation and compatible with the general principles and other provisions of
Community law. … Prudential rules shall be regarded as “legitimate interests” within that meaning’.

(19)

(20) Ruling in C-71/02, Karner, §§ 33, 34
(21)

See ruling in COM v Belgium, C-503/99, §47 with respect to the requirement of public security as a derogation from the funda-
mental principle of free movement of capital.
(22) C-55/94, Gebhard, §37 with further references
(23) Rulings in COM v Spain, C-463/00, §56, COM v UK, C-98/01, §43, COM v Portugal, C-367/98, §44 and COM v France, C-483/99,

§40

(24) This is reflected e.g. with respect to the need to satisfy supervisors of the business plan of the new entity, a vetting of the manage-
ment team and satisfaction that the necessary adjustments can be made to the banks' systems and reporting tools such as e.g. the
appropriate integration of risk management, customer and accounting systems and adaptation of control procedures and informa-
tion technology.

(25) Rulings in COM v Spain, C-463/00, §68, COM v Portugal, C-367/98, §49, COM v France, C-483/99, §45 and COM v Belgium, C-
503/99, §45 as well as ruling in joined cases C-163/94, C-165/94 & C-250/94, Sanz de Lera et al, §23 and ruling in C-54/99, Église
de Scientologie, §18
In the context of prudential supervision

(26)
(27) Rulings in COM v Spain, C-463/00, §69, COM v France, C-483/99, §46, COM v Portugal, C-367/98, §50, and in joined cases C-
163/94, C-165/94 & C-250/94, Sanz de Lera et al, §§23-28, C-302/97, Konle, §44 as well as rulings of 20.2.2001 in C-205/99,
Analir et al, ECR 2001, p. I-1271, §35 and of 5.3.2002 in joined cases C-515/99, C-519/99 to C-524/99 & C-526/99 to C-540/99,
Reisch et al, ECR 2002, p. I-2157, §37

(28) Rulings in COM v Spain, C-463/00, §69, COM v France, C-483/99, §46 and COM v Portugal, C-367/98, §50
(29) Rulings in COM v Spain, C-463/00, §75, COM v France, C-483/99, §50 as well as of 14/3/00 in C-54/99, Église de Scientologie,

§§21,22

(30) Ruling in COM v Spain, C-463/00, § 74 and C-54/99, Église de Scientologie, §§ 21,22.
(31) E.g. Article 33 of Directive 2000/12/EC of 20.3.2000 related to the taking up and pursuit of the business of credit institutions.