HASTINGS INTERNATIONAL AND COMPARATIVE LAW Review

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1 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

2 HASTINGS INTERNATIONAL AND COMPARATIVE LAW Review VOL. 40 WINTER 2017 NO. 1 EDITORIAL BOARD ( ) ARIANE A. MOTA Editor-in-Chief ELIANA CORONA KATHARINA ØSTERGAARD Productions Editors DENISE NGO MICHELLE HERNANEZ Submissions Editors MARY ARIASAIF XIAN ZHENG EMILY CLARKE Executive Editors REBECCA SHUMAN ENYA CHANG GOLZAR ANSARI-SHAHRI Articles Editors LORI KOMSHIAN Notes Editor NITIN SAPRA CIERRA ROGSTAD NATHALIE KOCH Production Assistant Editors GABRIELLE PARRIS Symposium Editor EUGENE FRID Senior Operations Editor ZOHRA SIDDIQ Technical Editor STAFF EDITORS ALLISON ADEY JUSTIN P. CAMPELL IAN A. BARBER SID SINGH TAO YU KATLYN AGUILAR TOM MCCARTHY Scholarly Publications Director

3 Hastings International and Comparative Law Review UNIVERSITY OF CALIFORNIA HASTINGS COLLEGE OF THE LAW 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 ) 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): scholarp@uchastings.edu. Business and editorial mailing address: 200 McAllister Street, San Francisco, CA Editorial office located at 100 McAllister Street hiclr@uchastings.edu. 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 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

4 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

5 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

6 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 SPENCER, B.A., J.D.... Visiting Clinical Professor of Law and Academic Director of Lawyers for America

7 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

8 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

9 JAMES PISTORINO, J.D.... Assistant Professor of Law RACHEL PROFFITT, J.D.... Assistant Professor of Law ERIC QUANDT, J.D.... Assistant Professor of Law CHARLES RAGAN, J.D.... Assistant Professor of Law ROBIN REASONER, J.D.... Assistant Professor of Law JENNIFER A. REISCH, B.A., J.D.... Assistant Professor of Law CHRISTOPHER RIES, B.S., J.D.... Assistant Professor of Law HON. A. JAMES ROBERTSON, J.D.... Assistant Professor of Law KEVIN ROMANO, J.D.... Assistant Professor of Law DAVID ROSENFELD, B.A., J.D.... Assistant Professor of Law KATHRYN ROSS, B.A., J.D.... Assistant Professor of Law ROBERT RUBIN, J.D.... Assistant Professor of Law DOUGLAS SAELTZER, J.D.... Assistant Professor of Law ROBERT SAMMIS, B.A., J.D.... Assistant Professor of Law JOACHIM SCHERER... Assistant Professor of Law JONATHAN SCHMIDT, J.D.... Assistant Professor of Law JAMES SCHURZ, J.D.... Assistant Professor of Law NINA SEGRE, J.D.... Assistant Professor of Law BAHRAM SEYEDIN-NOOR, J.D.... Assistant Professor of Law ROCHELLE SHAPELL, B.A., M.P.H., J.D.... Assistant Professor of Law ANN SHULMAN, B.S., J.D., LL.M.... Assistant Professor of Law ERIC SIBBITT, A.B., J.D., LL.M.... Assistant Professor of Law LARRY SIEGEL, M.A., J.D.... Assistant Professor of Law JEFFREY SINSHEIMER, A.B., J.D.... Assistant Professor of Law ROCHAEL SOPER, J.D., LL.M.... Assistant Professor of Law MATTHEW SOTOROSEN, J.D.... Assistant Professor of Law MARK SPOLYAR, B.S.E., J.D.... Assistant Professor of Law THOMAS E. STEVENS, B.A., J.D.... Assistant Professor of Law AURIA STYLES, J.D.... Assistant Professor of Law KIM SWAIN, J.D.... Assistant Professor of Law ROBERT TERRIS, M.A., M.S., J.D.... Assistant Professor of Law ABIGAIL TRILLIN, J.D.... Assistant Professor of Law JEFF UGAI... Assistant Professor of Law GLEN R. VAN LIGTEN, B.S., J.D.... Assistant Professor of Law BRUCE WAGMAN, B.S., J.D.... Assistant Professor of Law JAMES WAGSTAFFE, B.A., J.D.... Assistant Professor of Law CRAIG WALDMAN... Assistant Professor of Law LISA WALKER, J.D.... Assistant Professor of Law VAUGHN WALKER... Assistant Professor of Law ALLISON JANE WALTON, J.D.... Assistant Professor of Law DAVID WARD, B.A., M.A., J.D.... Assistant Professor of Law ANTON WARE B.A., M.A., J.D.... Assistant Professor of Law JEFFREY WILLIAMS, A.B., J.D.... Assistant Professor of Law JOHN D. WILSON, B.A., J.D.... Assistant Professor of Law JOHN S. WORDEN, B.A., J.D.... Assistant Professor of Law PAUL ZAMOLO., A.B., M.P.P., J.D.... Assistant Professor of Law

10 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 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 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 By Giuliano G. Castellano And Geneviève Helleringer In the aftermath of the 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

11 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 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 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.

12 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: p.delimatsis@uvt.nl.

13 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 counsel 3 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, 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]

14 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 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 (1994), as reported in THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF

15 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 (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 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 United Nations Statistical Papers, Provisional Central Product Classification, Series M No. 77, (1991). The United Nations Statistics Division currently uses the CPC Version See GATS, supra at note 10, Trade in Professional Services, Note by the Secretariat, MTN.GNS/W/67, (1989).

16 2017] The Future of Transnational Self-Regulation , it resumed its precrisis levels, whereas global services exports grew by five percent in 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 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 See Rainer Lanz & Andreas Maurer, Services and Global Value Chains Some Evidence on Servicification of Manufacturing and Services Networks, WTO Working Paper ERSD , (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 See also Integreon, Submission on Legal Process Outsourcing to ABA Commission on Ethics 20 /20, June ValueNotes, LPO fastest growing segment in India, March 12, 2014, http.// nquotes.com/content/view/913/1.

17 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 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.// 913/ 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).

18 2017] The Future of Transnational Self-Regulation 7 of 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 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: _-_short-term_ indicators. 25. See WTO, International Trade Statistics 2015, pp. 143, Id. at 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).

19 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 (1982). 30. Cf. Birutė Šiba, supra note 5, at 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).

20 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).

21 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? (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.

22 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 control 49 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/ Automatic recognition means that no discretion is left to the host country. See Case C- 365/13, Ordre des architects, E.C.R 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 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 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.

23 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 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).

24 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).

25 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.

26 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: See CCBE Position on Regulatory and Representative Functions of Bars (June 2005), 1_ pdf (last visited on Jan. 15, 2016). 62. Canada (Attorney General) v. Law Society of British Columbia (1982) 2.S.CR. 307, (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).

27 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 SCC 732 (India).

28 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).

29 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.

30 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 alone, the Ombudsman services helped resolve about 7,500 complaints 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 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), 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), /09/Annual-Report pdf.

31 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 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 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, orm-rules.aspx. 78. See Marietta Auer, The Anti-Network. A Comment on Annelise Riles, 56 AM. J. COMP. LAW 631, (2008).

32 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 ( ) 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).

33 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

34 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.

35 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 Trans- Pacific 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, Services-Chapter.pdf? [hereinafter TPP Final Text]. 92. See TPP Final Text, supra note 91, at art

36 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).

37 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, 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).

38 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).

39 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 (2015) See Anne Krueger, The Political Economy of the Rent-Seeking Society, 64 AM. ECON. REV. 64, 291 (1974) 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).

40 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 The latest edition dates back to 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), 4E40156C19CE For a list of the IBA resolutions, see IBA guides, rules and other free materials,

41 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 21 st 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, 43-62, 2006 E.C.R. I-8613, (the Court cast doubts as to the impartiality of a disciplinary body which is composed exclusively by lawyers) See International Association for Lawyers, Resolutions and Charters, org/en/documentation/resolutions (last accessed on Apr. 15, 2016).

42 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, Rostain, supra note 60, at 173.

43 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 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 ETHICS_Final.pdf (last accessed on Apr. 22, 2016) 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).

44 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 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, See Washington Accord, IEA, (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) 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).

45 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 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 Version-1.pdf See also INT L FED N OF CONSULTING ENG RS, (last visited May 4, 2016).

46 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: /default/files/aias pdf (last accessed on May 2, 2016) The most recent revised version can be found at: default/files/charte-en.pdf (last accessed on May 2, 2016).

47 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) See the proposal of 2006 at: G207UIADomreg.pdf (last accessed on May 2, 2016).

48 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) IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION TRANSCENDING THE DEREGULATION DEBATE 38 (Oxford University. Press 1995) Id.

49 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 Richard Baldwin & Julia Black, Really Responsive Regulation, 71 MODERN L. REV. 59 (2008) 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) It bears noting that disbarment is not necessarily permanent, as reinstatement is possible in some states.

50 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 This is, for instance, the case with the Sarbanes-Oxley Act: 15 U.S.C (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 (2006) 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) Complaints relating to advertising shall be raised with the Attorney Advertising Committee Cf ABA Model Rules for Lawyer Disciplinary Enforcement, more recently amended in 2002.

51 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 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: (last accessed on May 10, 2016) Zauderer v. Office of Disc. Counsel, 471 U.S. 626, 655 (1985) See Stuart Rabner & Charles Centinaro, State of the Attorney Disciplinary System Report 2014, Leslie Levin, The Case for Less Secrecy in Lawyer Discipline, 20 GEORGETOWN J. OF LEGAL ETHICS 1 (2007) ABA Commission on Evaluation of Disciplinary Enforcement, Lawyer Regulation for a

52 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) See Stuart & Rabner, supra note 133, at 18ff 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) ABA Survey on Lawyer Discipline Systems 2014, Charts I and II In the United States, there is also a website which allows ratings of lawyers. See for instance:

53 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) See infra Section III Rules DR 2-103(A) & DR 2-104(A) of the Ohio Code of Professional Responsibility (1970) See CCBE Recommendations on Disciplinary Process for Legal Professions, pf (last visited Mar. 15, 2016) The Solicitors Regulation Authority licensed the first ABS in March 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

54 2017] The Future of Transnational Self-Regulation , 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 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 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) 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) The UK regulatory framework also includes a Legal Ombudsman and an Office of Legal Complaints See Solicitors Disciplinary Tribunal, In the Matter of Pawan Vikram Sharma, No

55 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 Society 150 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: Solicitors Regulation Authority v Parwan Vikram Sharma (2010) QBD (Admin) EWCA Civ 1285, (2008) 1 WLR 1286 (2009) 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 C-506/04, Wilson (2006) E.C.R. I-8613,

56 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,

57 46 Hastings Int l & Comp. L. Rev. [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 /99, Case 246/80, Broekmeulen v Huisarts Registratie Commissie, 1981 E.C.R

58 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 Regulations 4 CSR (7) and 4 CSR , which subject Mr. Bird to discipline under section (6) Bird v. Missouri Board of Architects, Professional Engineers, Professional Land Surveyors and Landscape Architects, 259 S.W. 3d 516 (2008).

59 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) See also Sarah Pfatteicher, The Hyatt Horror : Failure and responsibility in American Engineering, 14:2 ASCE JOURNAL OF PERFORMANCE OF CONSTRUCTED FACILITIES 62 (2000) See also Norbert Delatte, International Ethics and Failures. Case Studies, in ENGINEERING ETHICS FOR A GLOBALIZED WORLD 39 (Colleen Murphy et al., eds., 2015) NAT L SOC Y OF PROF. ENGINEERS, Code of Ethics for Engineers, 2016, Publication # 1102.

60 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 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

61 50 Hastings Int l & Comp. L. Rev. [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 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 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 Council Directive 2005/36/EC O.J. (L 255), at art. 21 (Professional Qualifications) NAT L ETHICS COUNCIL, Rules of Procedure, THE AM. INST. OF ARCHITECTS 3. (2016) THE AM. INST. OF ARCHITECTS, The Architect s Handbook of Professional Practice, 6 (2008).

62 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 , 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: aia/documents/document/aiab pdf (last visited Oct. 15, 2016).

63 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., (last visited May 2, 2016) See Investigation Rules and Professional Conduct Committee Rules, ARCHITECTS REGISTRATION BD., %20A.pdf (last visited Apr. 20, 2016).

64 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) Chandler v. Alta. Ass n of Architects, [1989] 2 S.C.R. 848 (Can.) Bates v. State Bar of Az., 433 US 350 (1977).

65 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) Bates, 433 U.S. at Id. at Shapero v. Kentucky Bar Ass n., 486 U.S. 466, 472 (1988) 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, Virginia Pharmacy Board v Virginia Citizens Consumer Council, Inc., 425 US 748, at (1976); Friedman v. Rogers, 440 U.S. 1 (1979); Pittsburgh Press Co v. Human Relations Comm n, 413 U.S. 376 (1973).

66 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. 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, Sauderer, 471 U.S. 626 (1985).

67 56 Hastings Int l & Comp. L. Rev. [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; 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: 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 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) The Florida Bar v. Went For It, Inc., 515 U.S. 618 (1995) Alexander v Cahill, 589 F.3d, 79 (2d Cir. 2010) Floriba Bar v. Pape, 918 So. 2d 240 (Fla. 2005) Inre RM.J. 455 U.S. 191, 203 (1982).

68 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 Id. at Public Citizen Inc v. Couisimm Attorney Disciplinary Board, 632 F3d 212 (5th Cir. 2011) De Moor v. Belgium, 1994 E.C.H.R No

69 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) Cf. NCAA v. Board of Regents, 468 U.S. 85, (1984); Case C-351/12, OSA, 2014, C.J.E.U., 110, See, Lewis Goldfarb v. Virginia State Bar, 421 U.S. 773, (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 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 California Dental Association v FTC, 526 U.S. 756 (1999) 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) Cf. Communication from the Commission Report on Competition in Professional Services, COM (2004) 83 final, at 3 (2004).

70 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) Commission Decision of 24 June 2004 relating to a proceeding pursuant to Article 81 of the EC Treaty concerning case COMP/A Belgian Architects Association (June 24, 2004) Lewis Goldfarb, 421 U.S. 773, 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) 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.

71 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 National Society of Professional Engineers v. United States, 435 U.S. 679, 679 (1978) Id. at 697, citing to Giboney v Empire Storage & Ice Co., 336 US 490, 502 (1949).

72 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. Brown 206 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 The state-action exemption was recognized by the US Supreme Court in Parker v Brown, 317 U.S. 341 (1943) North Carolina State Board of Dental Examiners v. FTC, 135 S.Ct.1101, 1112 (2015) 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) 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).

73 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) Case T-144/99, Institut des mandataires agréés (2001) E.C.R. II-1087, Case C-49/07, Motosykletistiki Omospondia Ellados NPID (MOTOE) v. Elliniko Dimosio (2008) E.C.R. I-4863, 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 Wouters, supra note 208 at Id 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, 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.

74 2017] The Future of Transnational Self-Regulation 63 the Treaty on European Union-TEU 218 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 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, 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) Case C-250/03, Mauri (2005) E.C.R. I-1267, Wouters, supra note 208 at See Ordem dos Técnicos Oficiais de Contas v. Autoridade da Concorrencia, supra Note 208, at 57.

75 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 Wouters, supra note 208, at 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, 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 at Decision of , COMP/ PO / L'Ordre des Architectes belges, available at : accessed September 15, 2016) FINNISH COMPETITION AUTHORITY, Output limitation in application of architectural competition conditions. Dnro 669/61/02, (October 11, 2004).

76 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, See, by analogy, Case C-384/93, Alpine Investments, 1995 E.C.R. I-1141, 28, 38.

77 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 informality 230 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) Cf. Kalypso Nicolaidis & Gregory Shaffer, Transnational Mutual Recognition Regimes: Governance Without Global Government, 68 L. & CONTEMP. PROBS. 263, at (2005) (arguing that commitment by States still matters even when private bodies in fact finalize and operate a transnational agreement) 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).

78 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 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) See also, RICHARD SUSSKIND & DANIEL SUSSKIND, THE FUTURE OF THE PROFESSIONS: HOW TECHNOLOGY WILL TRANSFORM THE WORK OF HUMAN EXPERTS (Oxford Univ. Press, 2015) See also Ray Worthy Campbell, Rethinking Regulation and Innovation in the US Legal Services Market, 9 NYU J. OF L. & BUS. 1 (2012).

79 68 Hastings Int l & Comp. L. Rev. [Vol. 40:1 ***

80 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 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).

81 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. OF 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 (March 2009), available at 4. Kristine Erta et al., Applying Behavioral Economics at the Financial Conduct Authority, Financial Conduct Authority, Occasional Paper No. 1 (April 2013), available at 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).

82 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.

83 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 Id. at 689.

84 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

85 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

86 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 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

87 76 Hastings Int l & Comp. L. Rev. [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 Governance of Financial Regulation 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 ( ) 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).

88 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 ( ) and continue to present days, with the Eighth European Parliament ( ). 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 Larosie re 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).

89 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.) ii.) iii) 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. 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. 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).

90 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 (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, (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.

91 80 Hastings Int l & Comp. L. Rev. [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 /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).

92 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

93 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, (2014). 50. Case 6/64, Flaminio Costa v. National Electricity Board (ENEL), 1964 E.C.R 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).

94 2017] EU Financial Regulators 83 integrity of integrated financial markets. Following the 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 EU 55 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: , 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).

95 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 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 O.J. [Hereafter EC Treaty]. 61. Founded, respectively, in 1664 and in Rosa M. Lastra, The Evolution of the European Central Banki, 35 FORDHAM INT L L.J (2012).

96 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 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).

97 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).

98 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,

99 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).

100 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/ , 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 (L 173) 179 (EU)). 79. Moloney, European Banking Union, supra note 35 at 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).

101 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 Case 9/56, Meroni & Co., Industrie Metallurgiche s.p.a v. High Authority, , E.C.R. 133; Case 10/56 Meroni & Co., Industrie Metallurgiche s.p.a v. High Authority, , E.C.R 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.

102 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 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 post- Lisbon 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 Cf. Gary Lawson, The Rise and Rise of the Administrative State, 107 HARV. L. REV (1994).

103 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 intergovernmental 91 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.

104 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).

105 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 Sub- Committee 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 Andrea Enria, Chairman of EBA, Challenges for the Future of EU Banking, Speech made at Madrid 3d Financial Meeting, Jan Eilís Ferran, The Existential Search of the European Banking Authority, EUR. BUS. ORG. L. REV. 1 (2016).

106 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. Fiske, Four Forms of Sociality, supra note Id. at Id. at Id. at 690.

107 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 Kenneth J. Arrow & Gerard Debreu, Existence of an Equilibrium for a Competitive Economy, 22 ECONOMETRICA. 265, (1954) See generally, KARL POLANYI, THE GREAT TRANSFORMATION: THE POLITICAL AND ECONOMIC ORIGINS OF OUR TIMES (Beacon Press 2001).

108 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 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] Daniel Kahneman, Jack L. Knetsch & Richard H. Thaler, Fairness and Assumptions of Economics, 59 J. BUS. 285 (1986) See, generally, JOHN RAWLS, A THEORY OF JUSTICE (Harvard University Press 2009) 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) Fiske, Four Forms of Sociality, supra note 16, at 693.

109 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 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 The concept is well established in the organizational literature, see Stuart Albert & David A. Whetten, Organizational Identity, 7 RES. ORG. BEHAV. 263 (1985) See Morton Deutsch & Harold B. Gerard, A Study of Normative and Informational Social Influences upon Individual Judgement, 51 J. ABNOR. & SOC. PSYCHOL. 629 (1955) See IRVING L. JANIS, GROUPTHINK: PSYCHOLOGICAL STUDIES OF POLICY DECISIONS AND FIASCOES (Houghton Mifflin 1982).

110 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) Fiske, Four Forms of Sociality, supra note 16, at See CHARLES HORTON COOLEY, HUMAN NATURE AND THE SOCIAL ORDER (Transaction Publishers 1992) BENJAMIN R. BARBER, STRONG DEMOCRACY: PARTICIPATORY POLITICS FOR A NEW AGE (University of California Press 2003) 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 (Guenther Roth & Claus Wittich eds., University of California Press 1978) SIGMUND FREUD, GROUP PSYCHOLOGY AND THE ANALYSIS OF THE EGO (W.W. Norton & Company 1975) Fiske, Four Forms of Sociality, supra note 16, at 711.

111 100 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 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.

112 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 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) 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.

113 102 Hastings Int l & Comp. L. Rev. [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 Allport, supra note 127, at 11.

114 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 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 Ever-Closer-Union-REPORT.pdf David Howarth & Lucia Quaglia, The Steep Road to European Banking Union: Constructing the Single Resolution Mechanism, 52 J. COMMON MKT. L. REV. 125, (2014) 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).

115 104 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: , 7 (European Commission 1995) Lastra, supra note 62, at Fiske, Four Forms of Sociality, supra note 16, at 697.

116 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 TEU, supra note 14, at art. 17(4) 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 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 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).

117 106 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) See Karen S. Cook & Eric Rice, Social Exchange Theory, HANDBOOK OF SOCIAL PSYCHOLOGY 61 (John DeLamater & Amanda Ward eds., Springer 2013) See Wonka, supra note 142.

118 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 TFEU, supra note 15, at art. 283(1) Id. at art. 283(2) The countries in this group are France, Germany, Italy, the Netherlands, and Spain.

119 108 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 ESMA Regulation, supra note 33, at art For a thorough analysis over the mechanisms and the functioning of ESMA, see Moloney, supra note 91.

120 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) 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), 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) John Kay & John Vickers, Regulatory Reform An Appraisal, DEREGULATION OR RE- REGULATION: REGULATORY REFORM IN EUROPE AND THE UNITED STATES, (Giandomencio Majone ed., St. Martin s 1990).

121 110 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) Id. at art. 45(1) 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 Id. at art The provisions here analyzed are also contained in the regulations establishing the EBA and the EIOPA ESMA Regulation, supra note 33, at art. 1(5) Id. at art. 42 para European Securities and Markets Authority Annual Report 9, (2011).

122 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 ESMA Regulation, supra note 33, at art. 62(1) See generally, The European Supervisory Agency, Review of the New European System of Financial Supervision, Mazars (2013) Id. Part 1 at 14.

123 112 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 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) 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, 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 (Feb. 2016).

124 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, 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).

125 114 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 /cms_data/docs/pressdata/en/ec/ pdf Allport, supra note 127, at Id. at Fiske, Four Forms of Sociality, supra note 16, at 697.

126 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 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, Mehreen Khan, Juncker To Appoint New UK Commissioner As Security Chief, FINANCIAL TIMES, Aug. 2, 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 Id. at 5.

127 116 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 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) Thierry Chopin & Christian Lequesne, Differentiation as a Double-Edged Sword: Member States Practices and Brexit, 92 INT L AFF. 531 (2016) 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.

128 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 Francesco Guarascio, Parlez-vous Brexit? EU Negotiator Wants Brits to Talk French, REUTERS, Oct. 21, European Council, Bratislava Declaration, 1 (informal meeting, Sept. 16, 2016), available at 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 See Donald Tusk, President of European Parliament, Remarks of The President of The European Parliament Following The European Council Meeting (Oct , 2016).

129 118 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) 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 Id 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 s.cfm?abstract_id=

130 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 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) Id. at 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).

131 120 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

132 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.

133 122 Hastings Int l & Comp. L. Rev. [Vol. 40:1 ***

134 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 , 2014), 123

135 124 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 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 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 Zha Daojiong, China s Economic Diplomacy Focusing on the Asia-Pacific Region, 1(1) CHINA QUARTERLY OF INTERNATIONAL STRATEGIC STUDIES 85, (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), post.com/dr-nasser-h-saidi/the-gulf-should-pivot-eas_b_ html. 5. Olivia Enos, Why China s Human Rights Violation Do Matter, daily signal, Sept. 23, 2015, 6. TAREQ Y. ISMAEL, MIDDLE EAST POLITICS TODAY: GOVERNMENT AND CIVIL SOCIETY 339 (2001). 7. Jennifer Fenton, Significant Ramping of Political Repression in the Gulf, Activists Warn, ALJAZEERA AM., Apr. 15, 2015,

136 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 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), default/files/asia%20program_china%20and%20the%20pg.pdf. 12. Andersen & Jiang, supra note 11 at Gonzalo Villalta Puig & Amer Al-Khodiry, The Economic and Monetary Union of the Gulf Cooperation Council, 46 J. OF WORLD TRADE 121, (2012). 14. Andersen & Jiang, supra note 11 at 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 Jon B. Alterman, China s Balancing Act in the Gulf, CTR. FOR STRATEGIC & INT L STUDIES, 3 (2013).

137 126 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 threats 19 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 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 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 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 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), 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), 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), /en/article/ /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, 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), Ali Al-Abdulrazzaq & Kevin Carey, Economic Integration in the GCC, THE WORLD BANK (2010), Studyweb.pdf.

138 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 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 Tim Callen & Reda Cherif, Economic Diversification in the GCC: Past, Present, and Future, IMF STAFF DISCUSSION NOTE (2014), 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 Callen & Cherif, supra note Matteo Legrezi & Fred H. Lawson, China s Gulf Policy: Existing Theories, New Perspectives, 22 (2) MIDDLE EAST POLICY 58, (2015). 34. Wu, supra note Robert Bailey, China and GCC: Growing Ties, GULF BUSINESS, Apr. 16, 2013, GCC and China Decide to Speed up Free Trade Talks, SAUDI GAZETTE, Jan. 21, 2016, Id.

139 128 Hastings Int l & Comp. L. Rev. [Vol. 40:1 The Parties began negotiations in 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 Sino-GCC negotiations for the FTA resumed in December Subsequently, Xi met with Saudi Arabia s Deputy Crown, Prince Mohammed bin Salmon on January 19, They have agreed to expedite progress to conclude a comprehensive FTA by the end of 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, Subsequently, the Parties held the seventh round of negotiations in Guangzhou from May 8 to 10, 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), amhouse.org/sites/files/chathamhouse/publications/research/ chinamiddleeastenr gydaojiongmeidan.pdf. 39. China, GCC Vow to Reach Comprehensive FTA within 2016, MINISTRY OF COMMERCE, PRC (Jan, 28, 2016), /201601/30498_1.html. 40. Bailey, supra note China, Saudi Arabia Elevate Bilateral Ties, Eye More Industrial Capacity Cooperation, XINHUA, Jan. 20, 2016, htm. 42. The 6th Round of China - GCC FTA Negotiations Held in Riyadh, Saudi Arabia, MINISTRY OF COMMERCE, PRC (Mar. 10, 2016), /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), shtml. 45. Interpretation for China - Australia Free Trade Agreement, MINISTRY OF COMMERCE, PRC (June 19, 2015), / shtml, [hereinafter Interpretation for China-Australia Free Trade Agreement]. 46. Kevin Körner, The GCC Going East, DEUTSCHE BANK, Feb. 18, 2014, at 4, 87/The+GCC+going+East%253A+Economic+ties+with+developing+Asia+on+the+rise.pdf.

140 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 countries 53 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 Whalley, supra note 1 at Id. at 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 /files/roio_davisintro.pdf. 51. Constantine Passaris, CETA - Greece s Saviour?, OPENCANADA.ORG, Dec. 2, 2014, 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, (2014). 54. Kristian Coates Ulrichsen, THE GULF STATES IN INTERNATIONAL POLITICAL ECONOMY (International Political Economy Series, 1st ed. 2015).

141 130 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 Both sides had actually agreed on the market access of 97 percent of goods in 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), Hashmi, supra note Valentina Kostadinova, What is the Status of the EU - GCC Relationship?, GULF RESEARCH CENTER, at 3-4, 10 (2013), Ayadi, supra note Kostadinova, supra note 57, at China, GCC Agree to Accelerate FTA Negotiations, NEWS OF THE COMMUNIST PARTY OF CHINA, Jan. 16, 2016, Ulrichsen, supra note 54.

142 2017] Challenges and Opportunities GCC 131 rate was 9.6% in The average tariff for agricultural products is 15.2% while the average tariff for nonagricultural products is 8.6% in 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 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 Assessing Investment Policies of Member Countries of the Gulf Cooperation Council, MENA - OECD Investment Programme, at 12, presented on Apr. 5, 2011, 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),

143 132 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 security 68 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, Mo, supra note Bailey, supra note 35.

144 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 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), 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), Benefits of FTA between Singapore and China, BRYAN CAVE INTERNATIONAL CONSULTING (2013), /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), /download/files/153/ pdf. 74. EFTA and GCC, EFTA-GCC Free Trade Agreement, June 22, 2009.

145 134 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 Moshel Hirsch, The Politics of Rules of Origin, HEBREW UNIVERSITY OF JERUSALEM (June 2013), Kerry A. Chasl, Protecting Free Trade Political Economy of Rules of Origin, 62 INT L ORG. 507 at (2008). 78. Dokki Abdallah El-Kateb St., Free Trade Agreements and Rules of Origin, INTL S CTR FOR ECON. GROWTH at 2 (2015), Paul Brenton, Enhancing Trade Preferences for LDCs: Reducing the Restrictiveness of Rules of Origin, THE WORLD BANK, at 281 (2005), TTRADE/Resources/ /23.RulesOfOrigin.pdf. 80. Levin Flake, India s Agricultural Exports Climb to Record High, UNITED STATES DEPARTMENT OF AGRICULTURE FOREIGN AGRICULTURAL SERVICE (Aug., 2014),

146 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), FTA Talks Reach across the Gulf, CHINA DAILY (Dec. 30, 2014), org.cn/business/ /30/content_ htm. 83. Erlinda & Balboa, supra note Textile and Apparel Market in China, EU SME CENTRE, (2011), in_china_sep_2011.pdf. 85. Erlinda & Balboa, supra note Agreement on the Application of Sanitary and Phytosanitary Measures, Apr. 15,

147 136 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 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 would merit specific consideration during negotiations of the SPS and TBT chapter (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 Fred Gale, China s Growing Demand for Agricultural Imports, 19 U.S.D.A. (Feb. 2015), available at Houcine Boughanmi, Food and Agricultural Trade in the GCC: An Opportunity for South Asia?, 4, UN ESCAP (2014), d%20agricultural%20trade%20in%20the%20gcc_jeevika_sept2014.pdf. 91. Food International, GCC Food Retail Will be Worth $155 Billion by 2018, GULFOOD (2015), billion-by 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),

148 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 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 equivalence 99 and verification 100 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), ltural%20import%20regulations%20and%20standards%20%20narrativebeijingchina%20 %20Peoples%20Republic%20of pdf. 95. World Trade Organization, Trade Policy Review Report by the Secretariat China, WTO Doc WT/TPR/S/ (2014). 96. GCC Guide for Control on Imported Foods, THE GCC AGRICULTURE & FISHERIES RESOURCES DIRECTORATE (2015), owone&bid= World Trade Organization, Trade Policy Review Report by the Secretariat Bahrain, WTO Doc WT/TPR/S/ (Mar. 18, 2014). 98. New Zealand-China Free Trade Agreement, N.Z.-China, art. 79, Oct. 1, 2008 [hereinafter NZCFTA]. 99. Id. at art Id. at art Id. at art Id. at art. 86.

149 138 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 Bahrain 105 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] 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, (2015) Saudi Arabia Trade Policy Review, supra note 92 at China Meeting Minutes, supra note 22 at China-Australia Free Trade Agreement, China-Austl., art. 5.8, Dec. 20, 2015 [hereinafter ChAFTA] Villalta Puig & Dalke, supra note 104, at China Meeting Minutes, supra note 22, at Saudi Arabia Trade Policy Review, supra note 92 at 89.

150 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 The Kingdom of Saudi Arabia Minutes of the Meeting, WTO Doc. WT/TPR/M/ , (May 31, 2016) [hereinafter Saudi Arabia Meeting Minutes] Id. at Villalta Puig & Dalke, supra note China Meeting Minutes, supra note 22 at 6.3.

151 140 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 & CHRISTINE E. BOISROBERT ET AL., ENSURING GLOBAL FOOD SAFETY: EXPLORING GLOBAL HARMONIZATION 60 (Academic Press, 1st ed. 2010) Id United Arab Emirates Trade Policy Review, supra note 65 at Villalta Puig & Dalke, supra note ChAFTA, supra note 107 at art. 6.8(4) Villalta Puig & Dalke, supra note 104.

152 2017] Challenges and Opportunities GCC 141 in the Sino-GCC meeting of China released its first software package for exports of nuclear power in December 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), China Releases First Software Package for Nuclear Exports, THE ECONOMIC TIMES (Dec. 18, 2015), Sujata Ashwarya, Saudi Arabia s Nuclear Energy Plans: Problems, Prospects and Politics, GULF RESEARCH MEETING (2016), =MTg2&pid=MTA3OQ Rinkesh, Nuclear Waste Disposal, CONSERVE ENERGY FUTURE (2016), 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, (2011) United Arab Emirates Trade Policy Review, supra note 66 at ChAFTA, supra note 107 at art ChAFTA, supra note 107 at art Villalta Puig & Dalke, supra note 104.

153 142 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 Mike Orcutt, China Will Soon Leapfrog Traditional Leaders in Nuclear Power, MIT TECH. REV., July 27, 2015, ChAFTA, supra note 107 at art. 5.11, ChAFTA, supra note 107 at art. 5.10, GSFTA, supra note 103 at art. 2.10(3), 2.11(3) Villalta Puig & Dalke, supra note Id The Second China-GCC Strategic Dialogue Held in Abu Dhabi, MINISTRY OF FOREIGN AFFAIRS OF THE PEOPLE S REPUBLIC OF CHINA, May 5, 2011,

154 2017] Challenges and Opportunities GCC 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. General Agreement on Trade in Services art. II, Apr. 15, 1994 [hereinafter GATS] Id. at art. XVII, XVI Wu, supra note Kate Axup et al., Focus: The China-Australia Free Trade Agreement, ALLENS

155 144 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 ), Interpretation for China-Australia Free Trade Agreement, supra note Axup, supra note Supra note United Arab Emirates Trade Policy Review, supra note 66, at para. 166, What We Can Expect from Xi s Visit, CCTV (Jan. 19, 2016), /01/19/VIDE54wN2CkNkQ4TmTgSyYBg shtml Richard Martin, China Is on an Epic Solar Power Binge, MIT TECHNOLODGY REVIEW BLOG, (March 2016), 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).

156 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 China Meeting Minutes, supra note 22 at United Arab Emirates Trade Policy Review, supra note 65 at China Meeting Minutes, supra note 22 at Qatar, Bahrain and Oman Minutes of the Meeting, WTO Doc. WT/TPR/ M/ (June 19, 2014) Assessing investment policies of member countries of the Gulf Cooperation Council, supra note 64, at Factsheet: Trade in Services, AUSTL. GOV T (July 1, 2016), trade/agreements/chafta/fact-sheets/documents/fact-sheet-trade-in-services.pdf Muhammad Zulfikar Rakhmat, Monthly Monitor Report, GULF STATE ANALYTICS (June 2015), United Arab Emirates Trade Policy Review, supra note 65 at Ahmad Mohammad Abu Qalbein, Challenges of Islamic Banking in Gulf Corporation Council, 8 EUR. J. OF BUS. & MGMT. 177, 184 (2016).

157 146 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 Id. at Saudi Arabia Trade Policy Review, supra note 92 at Trade Policy Review Report by United Arab Emirates, WTO Doc WT/TPR/G/338, 8.1, 9.4 (Apr. 27, 2016) China Meeting Minutes supra note 22 at Muhammad Zulfikar Rakhmat, China and the UAE: New Cultural Horizons, MIDDLE EAST INST. (2015), 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) Michael Barber et al., Improving Education in the Gulf, THE MCKINSEY Q. 39, 40 (2007),

158 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), Barber, et al., supra note 166, at Rahul Choudaha, How China Plans to Become a Global Force in Higher Education, THE GUARDIAN (Oct. 12, 2015), Callen & Cheirf, supra note 29.

159 148 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 Ingo Forstenlechner & Emilie J. Rutledge, The GCC's "Demographic Imbalance": Perceptions, Realities and Policy Options, MIDDLE EAST POL Y COUN. (2011), Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at Caroline Kelly, Facilitating Exploitation: A review of Labour Laws for Domestic Workers in the Gulf Cooperation Council Countries, INT L TRADE UNION CONFED. (2014), _clean_282_29.pdf Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at Mohammed Al Asoomi, Attracting Skilled Expatriates to GCC: In Theory, GULF NEWS,

160 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 doctors 179 and pilots 180 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, ory Dan Ilika, Better Labour Mobility Canada s Biggest CETA Win, Report Says, CANADIAN MANUFACTURING, July 31, 2014, Comprehensive Economic and Trade Agreement, art. 11, Can.-E.U., [hereinafter CETA] Cleofe Maceda, Health Care Sector in GCC Faces Talent Shortage, GULF NEWS, Jan. 10, 2014, GCC Aviation Spreading Wings to the World, AL MASAH CAPITAL MGMT. LTD. (Apr. 2015),

161 150 Hastings Int l & Comp. L. Rev. [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 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 Adam Bouyamourn, UAE signs up as founding member of Asian Infrastructure Investment Bank, The national business (2015) < g/uae-signs-up-as-founding-member-of-asian-infrastructure-investment-bank> Daojiong, supra note 2, at Saidi, supra note China Meeting Minutes, supra note 22 at

162 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. Mo, supra note Id Saudi Arabia Trade Policy Review, supra note 92 at Id. at The Kingdom of Saudi Arabia Meeting Minutes, supra note 111 at Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at 3.12, China Meeting Minutes, supra note 22 at Id. at Id. at Saudi Arabia Meeting Minutes, supra note 112, at Qatar, Bahrain and Oman Meeting Minutes supra note 152 at United Arab Emirates Trade Policy Review, supra note 66 at 38.

163 152 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 Saudi Arabia Trade Policy Review, supra note 92 at Qatar, Bahrain and Oman Meeting Minutes, supra note 152 at Saudi Arabia, China Issue Joint Communiqué on Establishing Comprehensive Strategic Partnership Between the Two Countries, supra note 22 at Saudi Arabia Trade Policy Review, supra note 106 at Christopher M. Dent, China s Investment Provisions in its Free Trade Agreements, ECRAN, 10 (Short Term Policy Brief 43, Feb. 2012) Daisy Mallet & James McKenzie, ISDS in ChAFTA Where s the beef?, KING & WOOD MALLISONS (2015), ChAFTA, supra note 107 at art. 9.3.

164 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), Id Id Francis Snyder, China, Regional Trade Agreements and WTO Law, 43 J. OF WORLD TRADE. 1, 1-57 (2009) REGIONAL TRADE AGREEMENTS AND THE WTO LEGAL SYSTEM 346 (Lorand Bartels & Frederico Ortino eds., Oxford Sholarship Online 2012) 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].

165 154 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) James McCall Smith, The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts, 54 INT L ORG. 137, 145 (2000) MING JIANGLI, CHINA JOINS GLOBAL GOVERNANCE: COOPERATION AND CONTENTIONS 84 (Lexington Books 2012) 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, (2011) Claude Barfield, WTO Dispute Settlement System in Need of Change, 37 INTERECONOMICS (2002).

166 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 Sappideen, supra note ChAFTA, supra note 108 at art. 15.6; GSFTA, supra note 104 at art. 9.3.

167 156 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

168 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 ChAFTA, supra note 107 at annex 15-B NZCFTA, supra note 98 at art. 191(5) 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, (2000) GSFTA, supra note 103 at art. 9.9(1) Id. at art. 9.9(5) GSFTA, supra note 103 at art. 9.8; ChAFTA, supra note 107 at art (7) China-Singapore Free Trade Agreement, China-Sing., art. 102(3), Jan. 1, 2009.

169 158 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.

170 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), 2. U.S. Equal Employment Opportunity Commission v. DolgenCorp, L.L.C., EEOC, 2014 WL (No. 13-CV-04307), (N.D. Ill. 2014). 3. Ben James, Dollar General Rips Rulings In EEOC Background Check Suit, LAW

171 160 Hastings Int l & Comp. L. Rev. [Vol. 40:1 this matter because Dollar General settled the case in 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 (May 21, 2015), 4. Meyer v. Nebraska, 262 U.S. 390 (1923). 5. Id.

172 2017] Background Checks & Employment Discrimination 161 I. 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 U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis, AMERICAN BAR ASSOCIATION (Mar. 11, 2013), /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), 8. Id. 9. Id. 10. Ruth Graham, How criminal records hold Americans back, THE BOSTON GLOBE (Mar. 08, 2015), Chad Terhune, The Trouble with Background Checks, BLOOMBERG BUSINESS WEEK (May 28, 2008,),

173 162 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 African- American 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 prospects 18 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 Graham, supra note Emsellem & Ziedenberg, supra note 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), Binyamin Appelbaum, Out of Trouble, but Criminal Records Keep Men Out of Work, N.Y. TIMES (Feb. 28, 2015), 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), ( 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 Travis, Solomon & Waul, supra note 15 at Emsellem & Ziedenberg, supra note 7 at 4.

174 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 two of the world s leading economic powers, they differ greatly in their approach to regulating preemployment background checks. The two governing bodies have different approaches in their attempts to regulate the use of personal 21. Appelbaum, supra note Emsellem & Ziedenberg, supra note 7 at Graham, supra note 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 content.cgi?article=1532&context=nyu_plltwp.

175 164 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), Fleshler, supra note Dimov, supra note 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 Id. 33. Edith L. Curry, To Snoop or Not to Snoop: Privacy Rights of Applicants and Potential Employees, AMERICAN BAR ASSOCIATION (Mar. 27, 2016), bar.org/publications/gp_solo/2012/november_december2012privacyandconfidentiality/to_s

176 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 Margaret Rouse, USA Patriot Act, TECH TARGET (May 27, 2016), management.techtarget.com/definition/patriot-act. 39. Id. 40. Id.

177 166 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. Graham, supra note Id. 43. Id. 44. Id. 45. Emsellem & Ziedenberg, supra note 7 at Graham, supra note Terhune, supra note Id. 49. Id.

178 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, Id. 51. Id. 52. Id. 53. Graham, supra note Terhune, supra note Appelbaum, supra note Fleshler, supra note Emsellem & Ziedenberg, supra note Appelbaum, supra note 16.

179 168 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), 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 Appelbaum, supra note Background Checking: The Use of Criminal Background Checks in Hiring Decisions, SOCIETY FOR HUMAN RESOURCES MANAGEMENT, (Mar. 19, 2016), available at

180 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 Curry, supra note Appelbaum, supra note Miriam Wugmeister, Comparing the U.S. and EU Approach to Employee Privacy, MORRISON FOERSTER (Apr. 02, 2016), Emsellem & Ziedenberg, supra note U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis, supra note Elena L. Pijoan, Legal Protections Against Criminal Background Checks in Europe, 16 (I) PUNISHMENT & SOCIETY 50, (2014). 73. U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis, supra note Id.

181 170 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 Dimov, supra note Id. 77. Wugmeister, supra note 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, 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), /hr-today/news/hr-magazine/pages/0413-international-background-screening.aspx. 82. Wugmeister, supra note Larrauri & Jacobs, supra note 25.

182 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 Wugmeister, supra note Commission Nationale de l'informatique et des Libertés CNIL, To protect personal data, support innovation, preserve individual liberties, Larrauri & Jacobs, supra note Id. at 14.

183 172 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 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 Fair Credit Reporting Act, 15 U.S.C (2012). 94. See, generally, Employers, U.S. EQUAL EMPLOYMENT OPPORTUNITY COMMISSION (Apr. 7, 2016), (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), Curry, supra note Id. 97. Wugmeister, supra note Curry, supra note 33.

184 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 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 Id Pre-Employment Inquiries and Arrest & Conviction, supra note Equal Employment Opportunity Commission v. BMW Mfg. Co., L.L.C., 2015 WL , 1, No. 7: HMH, (D.S.C. July 30, 2015) Id Id Equal Employment Opportunity Commission v. Freeman, 126 F. Supp. 3d 560 (D. Md. 2015) Id.

185 174 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 s/press/pdf/2015_ 2_Insight_Update_Criminal_Background_Checks_Impact_EEOC_v_Freeman.pdf Id 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) Hartstein, supra note Emsellem & Ziedenberg, supra note Nathaniel M. Glasser, Background Checks EEOC Seeks to Eliminate Barriers to Recruitment and Hiring, (June 23, 2015),

186 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 U.S. Strengthens Regulations on Background Checks in Light of Financial Crisis, supra note Graham, supra note Fleshler, supra note 1.

187 176 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.

188 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: 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 Telephone: wnw@uchastings.edu

189 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 TO ORDER A COPY OF WEST-NORTHWEST S GREATEST HITS AT THE SPECIAL, LIMITED-TIME-ONLY PRICE OF $15.00 PLEASE SEND YOUR NAME AND MAILING ADDRESS TO SCHOLARP@UCHASTINGS.EDU

190 Hastings College of the Law: The First Century 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: For more information: scholarp@uchastings.edu

191 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 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 Phone: (415) FAX: (415) Name Address City State Zip Number of copies requested: Numbered hardbound at $30.00 each Softbound at $18.00 each Enclosed is my check in the amount of $

192 HASTINGS SCIENCE AND TECHNOLOGY LAW JOURNAL RECOGNITION 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 Hastings Science and Technology Law Journal publishes exclusively online: websites/science-technology/index.php.

193 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: University of California Hastings College of the Law

194 Essays on the law and work of Roger Traynor -- published by UC Hastings College of the Law, To order:

195 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 hwlj@uchastings.edu hastingswomenslj.org

196 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: index.php. Hastings Race & Poverty Law Journal University of California Hastings College of the Law 200 McAllister Street San Francisco, CA (415)