Uniform Prospectus Liability Rules is Crucial for Capital Markets Union

ESMA has concluded its consultation on a possible uniformisation of prospectus liability in the EU. This project is meant to complement the uniform rules on the content of the prospectus and the procedure for its approval, which are laid down in the EU Prospectus Regulation. The latter only addresses a few aspects of liability for misleading or otherwise defective prospectuses in its Art 11. Otherwise, it leaves the question to national law. As a result, the rules governing such liability are currently fragmented over the 27 EU Member States.

Many of the answers provided to ESMA, available on its website, favour the harmonisation of prospectus liability rules. For instance, the Italian Association of Financial Market Intermediaries notes that ‘we are faced with a true panoply of heterogeneous regimes, something that hinders the development of a single market, creating not only inefficiencies, but also different treatments that can hardly be justified’. It also highlights that this ‘patchwork of approaches renders cross-border complicated and burdensome, and legal risks are magnified or, more precisely, hard to forecast’.

We have come to a similar conclusion in our own submission (to be found under ‘Radboud University’ on the website mentioned above). In particular, we highlight that

• the national law governing prospectus liability is hard to identify and foresee,
• the applicability of different national rules leads to investor discrimination,
• the fragmentation of the governing law hinders Pan-European collective redress.

Still, some of the responses provided to ESMA are remarkably reserved when it comes to the introduction of a European prospectus liability rule. Here are some of the key counter-arguments that are raised, and our thoughts on them.

A first argument against uniformisation is the claim that the legal differences would not be the most significant when it comes to the integration of the European financial market. Other differences, such as cultural divergences or divergent risk-appetites among investors, would be much more relevant. This argument is a classic. However, it overlooks that cultural divergences or differences in risk-appetite can hardly be changed by law reform. Obstacles by legal divergences, in contrast, can be removed by a stroke of the legislative pen. Whatever law can change should be changed in order to bring about a European capital market that deserves this name.

Another argument that is made is subsidiarity. It is claimed that the aim of liability for defective prospectuses could be better achieved on the national level. However, the past has shown that leaving this question to national legislators ends up in widely varying approaches and rules. These variations do not create any meaningful benefit. Specifically, they do not result in a regulatory competition for the best rule. This is because the applicable national rule depends, according to the Court of Justice of the European Union, on the domicile of the investor and the place of its bank account rather than on the place of incorporation of the issuer or the place where its securities are listed. For the same issuance, a multitude of different laws apply. This is in and of itself a problem.

This problem cannot be overcome by changing the conflict-of-laws rules, for instance by applying the law where the issuer is incorporated to prospectus liability. Such a rule has been suggested in the United States in the 1980s, but never made it into the statute book. The reason is simple: the need for investor protection. Investors deserve protection without having to study the prospectus liability rules of the issuer. This is one of the last issues they care about when investing, and rightly so. It would also distort the playing field if issuers who are listed on the same stock exchange were subject to widely diverging liability rules. This would invite regulatory arbitrage, i.e. choosing to incorporate in a country with low liability.

Finally, it is argued that the uniformisation of liability would be very complex and required a strong political will. As for complexity, we have shown in our response (cited above) that a uniform rule can be cast in a few very short articles. What is true is that uniformisation requires political will. In the past, Member States have been reluctant to touch upon questions of private law in order to not undermine the various national civil codes. Yet prospectus liability is a relatively specific and contained problem, which is often governed by statutory rules outside the civil code. Unifying this aspect of private law is unlikely to open the floodgates into a broad civil law harmonisation. It could be done by a pinpointed measure, but one with enormous benefits for the integration of the European capital market.

Danny Busch is a Professor of Financial Law at Radboud University, Nijmegen.

Matthias Lehmann is a Professor and Chair for Comparative Law at the Department for European, International and Comparative Law at the University of Vienna.