Fabrizio Cafaggi EUI

1. Fabrizio CafaggiEUI Private law making and Multilevel governance September 2008

2. Private law making • Private law making as a collective production of rules primarily to channel behaviour of members which influences also non-members – either by affecting contractual relations of members with non-members or by indirect impact on third parties • Private law making should be distinguished from private rule making which coincides with the conventional rule making activities of private parties grounded on freedom of contract • Private law making can proceed either through pure self-regulation, delegated self-regulation or co-regulation • Focus: production of private law rules (contract, property, civil liability) • Market-integrating private law making takes not only the form of total harmonisation but also other forms, like minimum harmonisation, mutual recognition

3. Private organisations • Interest-based (associations of undertakings, networks of firms) semi-independent organisations (stock-exchanges) • Meta organizations (organizations integrating organizations) v direct organizations (associations of undertakings) • Open (any firm in the industry can enter) v strategic organizations ( limited and controlled access) • Monopolistic organizations v competing organizations

4. The complementary reasons for the growing role of private law making • The conventional domain of private rule-making: freedom of contract and freedom of association • New phenomena: production of rules which reach beyond the members of the organisation • Delegation by public national or supranational authorities • Co-regulation

5. Different approaches to PLM • The institutional complementarity approach • PLM in a liberal State • PLM in a corporatist State • PLM in a regulatory State

6. Private law making at the global level • The different species of Private organisations and the difficulty to maintain the state-based public-private divide • Intergovernmental organisations • The role of NGO’s as private law makers

7. Institutional explanations for PLM at EU level • Institutional explanations concerning EU: • The competence deficit at EU level • The inability to reach political consensus • The effects of the proportionality principle • Market driven explanations

8. Why is private law making growing at EU level • The competence deficit • If no competences to legislate exist at EU level but the economic activity requires coordinated or uniform rules, private actors, mainly undertakings, reach agreements concerning the rules that permit market integration • Lack of political consensus • If MS do not reach political consensus private actors may generate contractual solutions to be later adopted by the legislator

9. Why is private law-making growing at EU level • The principle of proportionality • The application of the principle of proportionality requires the adoption of the legislative strategy to maximize effectiveness and efficacy of law making. • The principle of proportionality forces to engage into comparative institutional analysis to choose between public and private law making • The use of private law making may be preferable over public law making when more effective • In some countries (like UK) the interpretation of the proportionality principle as gone as far as identifying private law making as the first best to relegate public law making as a second best solution

10. Why is Private law making growing at EU level • Market driven explanations • Private law making, especially when aimed at regulating market failures may be driven by the market • When the introduction of new rules triggers new economic activities often the market is the major driver • Two examples: • Financial private regulation • Financial transparency may require the introduction of gatekeepers that verify compliance with rules. Often the activity of the gatekeepers is regulated by private law making • Product and services standards

11. Examples of private law making – recognized or empowered by EC law Unfair commercial practices • under certain circumstances non-compliance by the trader with commitments contained in codes of conduct by which the trader has undertaken to be bound may considered as a misleading commercial practice (Article 6(2)) Advertising Directive • MS can decide to allow the use of legal measures against a code owner where the relevant code promotes non-compliance with legal requirements (Article 5(2)) Capital Requirements Directive • Externalcredit assessment institutions issue credit ratings used for the assessment of risk weighs and thus for the specification of capital requirements • Banks can opt for internal ratings-based approach for the evaluation of their risk components

12. Examples of private law making – recognized or empowered by EC law The service directive 2006/123 • acknowledges lawmaking power of POs as relevant for the European legal integration • refers to private codes of conduct at EC level as promoting market integration by facilitationof the provision of services or the establishment of a provider in another MS, and by increasing the quality of services and building consumer confidence • MS and COM shall encourage the drawing up, particularly by professional bodies, organisations and associations, of EC-level codes of conduct • These codes are to set up only minimum standards and are complementary to national regulations; both MS and national professional bodies can adopt more stringent measures

13. Examples of private law making Banking sector • European Master Agreement for Financial Transactions (EMA) • Sponsored by the European Banking Federation, but the factual initiativewas on the banks themselves • Supported by public actors (both European and national) • By standardizing contractual practices at national and European level and by offering contractual documents of high quality EMA aims at securing liquidity of the transactions and thus of banks • Purports to facilitate cross-border trade in specific financial transactions • But: the harmonizing value is limited

14. The accountability deficit and its potential responses • Three potential responses • A) Governance and liability • B) public-private coordination • C) Market accountability

15. Governance and liability • The governance response is associated to the adoption of forms of organizational governance of private regulators which best suit the regulatory functions • Examples concerning governance choice • A) for profit-non profit • B) Company, associations, foundations • C) Membership • D) voting power • E) Exit

16. Liability of private regulators • The current systems provide little evidence that an effective liability system is in place and it works • Question: should/can we transplant the liability system adopted for Agencies or should we adjust the liability regime usually applied to private organisations?

17. Public/Private coordination • Different models of interaction between public and private actors • A) the ex post approval model ( formal or informal) • B) the delegation model ( rule-making based on principles defined by legislation) • C) the cooperation model ( co-making) • What are the implications of these three models for accountability purposes?

18. Market accountability • Plurality of private regulators competing for regulatees within a common frame of rules • The structure of market accountability • A) common rules concerning competition and cooperation among private law makers • B) individual rules concerning the relationships between regulators, regulatees and third parties • The competition among private law makers is achieved by minimizing switching costs

19. Agency theory of delegation and private regulation • The application of agency theory of delegation to private regulation • Principal/agent relationship in private regulation • A) self-regulation • Principals are the regulatees ( firms) and the final consumers • Agents the private regulatory bodies • Co-regulation • If there is delegation to private bodies principal is still the government which delegates to private instead of or in addition to public regulators • If there is independent exercise of regulatory power grounded on freedom of contract by private bodies the delegation stems from the original holders of regulatory power i.e. the firms and the final consumers • Need to revise the agency theory of regulation

20. Proposal: a new framework for European private rule making • Proposal: the introduction of a new legal framework to regulate European private rule making and its interaction with public rule making • A) Common principles concerning both public and private law making • The example of the legislative and regulatory reform Act of 2006 in UK, art. 2 Power to promote regulatory principle • Transparency, accountability, proportionality and consistency • B) Specific rules concerning private rule making • C) Detailed sector-specific rules

21. Conclusions • Private organisations both self-interested and semi-independent play a major role to create European rules and to integrate legal systems • They contribute to the creation and regulation of the European internal market • The complementarity of public and private law making in the field of EPL should redesign the multilevel governance strategy and the interaction between MS and EU level • The current trend towards total harmonisation should be replaced by a combination of minimum harmonization through public law making and further harmonization through private law-making when desirable • The traditional partitioning between public and private law making, employed for nation-states, appears inadequate for the European setting • They suffer from an accountability deficit that requires the introduction of new rules • A new legal framework should be proposed to • 1) warrant the benefits of private law making while • 2) ensuring its compatibility with democratic principles primarily the rule of law principle