Reviewing the norm issued by the Financial and Capital Market Commission, the Constitutional Court finds deficiencies in the democratic legitimisation of the Commission’s Council
On 20 February 2020, the Constitutional Court passed the judgement in case No. 2019-09-03 “On Compliance of Para 2.11. of the Regulation of 2 December 2018 of the Financial and Capital Market Commission No. 198 “Regulation on Determining the Amount of Payments by the Financial and Capital Market Participants for Financing the Financial and Capital Market Commission in 2019 and for Submitting Reports” with the First Sentence of Article 91 of the Satversme of the Republic of Latvia”.
The Contested Norm
Para 2.11. of the Regulation of 2 December 2018 of the Financial and Capital Market Commission (hereinafter – the Commission) No. 198 “Regulation on Determining the Amount of Payments by the Financial and Capital Market Participants for Financing the Financial and Capital Market Commission in 2019 and for Submitting Reports” (hereafter – the contested norm) provides that in 2019 the amount of payment by each credit institution for financing the operations of the Commission is 0.0106 per cent of the average quarterly assets of the credit institution.
The Norm of Higher Legal Force
The first sentence of Article 91 of the Satversme of the Republic of Latvia (hereinafter – the Satversme): “All human beings in Latvia shall be equal before the law and the courts.”
The Facts
The case was initiated on the basis of a constitutional complaint submitted by credit institution AS “PNB Banka”, registered in Latvia. It is noted in the application that legal norms define the Applicant’s obligation to make payments to finance the Commission’s operations. The Applicant holds that the contested norm is incompatible with the principle of equality, included in the first sentence of Article 91 of the Satversme, because, pursuant to the contested norm, in 2019 the amount in percentage to be paid for financing the Commission had been increased only for credit institutions, whereas with respect to other operators in the financial and capital market (hereafter – market operators) it remained in the previous amount or even had been reduced.
The Court’s Findings
On the scope of Article 91 of the Satversme
The Constitutional Court found that the contested norm affected the right of credit institutions, including the Applicant, to property and that, in reviewing the compliance of the contested norm with the principle of equality, the area of property rights should be taken into account. [18.]
On comparable groups of persons
In the framework of the present case, all market operators who are obliged to make payments to finance the Commission’s operations are in similar and according to definite criteria comparable circumstances. [20.3.]
On the manifestation of differential treatment
The Constitutional Court found that differential treatment of credit institutions had been established by the contested norm since, in 2019, the amount of payment to finance the Commission’s operations, in percentage, was increased only for them. [21.]
On whether the differential treatment envisaged by the contested norm had been established by law
On the democratic legitimisation of the Commission’s Council
To establish, whether the differential treatment envisaged in the contested norm had been established by law, the Constitutional Court has to assess, whether the Commission’s Council has proper legitimisation that would allow this Council to issue external regulatory enactments. [22.3.]
In a democratic state governed by the rule of law, the democratic legitimisation of the issuer of generally binding legal norms is closely linked to the exercise of the people’s power, by directly or indirectly legitimising the officials of a particular institution, and to the responsibility of these officials towards the people. If the issuer of a legal norm has been indirectly democratically legitimised then the legislator must establish an appropriate mechanism of supervision and accountability in order to, inter alia, decrease the possibility of arbitrariness in its work, in particular, with respect to issuing external regulatory enactments. [23.]
The Commission’s Council, which has the right, defined by law, to issue external regulatory enactments that are binding upon market operators, is a collegial institution. At the time when the contested norm was issued, the Saeima appointed the chairperson and deputy-chairperson of the Commission, whereas three remaining members of the Council, after receiving the approval of the President of the Bank of Latvia and the Minister for Finance, were appointed to and released from the office by the Commission’s chairperson. [23.1.]
On the Commission’s operations and supervision of the financial and capital market
The matter of the responsibility of an autonomous public institution must be examined in interconnection with the purpose, for which this institution has been established, and its status. The aims of the Commission’s operations have been defined, by taking into account the operations of the financial and capital market and its operators as well as the significant impact of the risks related to it on the national financial sector and economy in general. Therefore special regulation applies to this area, and it is subject to intensified supervision. Effective supervision of market operators ensures successful operation of the national financial sector and economy in general as well as sustainable development, it also protects the welfare of society and each member of it. The obligation to ensure effective supervision of the financial and capital market follows also from Latvia’s international commitments that it undertook by accession to the European Union. [23.2.]
The independence of an autonomous public institution in performance of its functions is one of the considerations why an institution like that is established and one of the characteristic features of such institution. [23.2.]
The supervisor of the financial and capital market has great possibilities to impact individual financial institutions, the consumer of financial services, and even the national interests. Therefore the mechanism of the institution’s supervision and accountability, set out in the law, should be commensurate to the essence and scope of the institution’s authorisation. [23.3.]
The Constitutional Court found: in view of the Commission’s essential significance in the national financial sector and the possibility to decide on the market operators’ rights and restrictions on these as well as the need to ensure independence of the Commission’s operations and the restricted possibilities of parliamentary supervision that follow from it, the democratic legitimisation of the Commission’s Council, as an institution that issues external regulatory enactments, was of particular importance. A situation, where external regulatory enactments are issued by an autonomous public institution, where the right to adopt decisions on issuing such regulatory enactments is granted also to such officials, about whom the Saeima had not decided on, would not meet the requirements of a democratic state governed by the rule of law. [23.3.]
The Constitutional Court found that the Commission’s Council had not been properly democratically legitimised to issue the contested norm and, thus, the differential treatment envisages by this norm had not been established in accordance with a legal norm adopted in the procedure set out in regulatory enactments. Hence, the contested norm is incompatible with the first sentence of Article 91 of the Satversme. [23.3.]
On the date as of which the contested norm becomes void
The contested norm is no longer applicable. The Applicant requests the Constitutional Court to recognise the contested norm as being void with respect to it as of 1 January 2019. [24 and 24.2.]
On ultra vires principle
Ultra vires principle is applicable in two cases. Firstly, if in the process of delegated legislation a norm has been issued outside the authorisation or in breach of the authorisation. Secondly, if an institution, which had issued the norm, had no right at all to issue external regulatory enactments because it had not been properly legitimised. The contested norm was issued by an institution which did not have legitimisation acquired in proper democratic procedure [24.1.]
The Constitutional Court has repeatedly recognised that in some cases it is possible and even necessary to proclaim the contested norm as being void as of the date when the judgement is pronounced or as of some past date. It is particularly important in those cases where, after the contested norm becomes vod, no regulatory enactment would provide precise regulation on a matter, and it would be even more incompatible with the Satversme as the current situation. Therefore, in exceptional cases, it is admissible that the contested act, although formally issued ultra vires, remains in force until the new norms enter into effect. [24.1.]
On the Saeima’s actions in amending the procedure for appointing the members of the Commission’s Council
The Saeima has become aware of the fact that the Commission’s Council lacked proper democratic legitimisation for issuing external regulatory enactments and, by amending the norms of the law on the Commission regarding the procedure for appointing the Council’s members, the Saeima has democratically legitimised all members of the Commission’s Council. [24.3.]
It follows from the fact that the Saeima set the task for the newly appointed chairperson of the Commission to propose for appointment by the Saeima the new candidates for the offices of the Council’s members “without delay” that the legislator’s aim was to ensure as fast as possible a situation where the whole composition of the Commission’s Council would be properly democratically legitimised and that the transitional provisions envisage only temporary regulation of the situation. [24.3.]
On the possible consequences that could be caused by recognising the contested norm as being void retroactively
To examine whether the contested norm should be recognised as being void as of 1 January 2019, inter alia, the possible consequences of recognising the contested norm as being void retroactively should be taken into account. [24.2.]
Although at the moment when the contested norm was issued the Commission lacked proper democratic legitimisation for issuing external regulatory enactments, it was, nevertheless, responsible for supervision of market operators, also the Applicant, in a procedure established by the legislator. All market operators, including the Applicant, as well as the State and society in general are interested in due functioning and supervision of the financial and capital market. [24.2.]
In view of the great importance of the supervision of the financial and capital market in the economy and the area of public welfare, the proportion of payments made by credit institutions in the Commission’s budget revenue as well as the legislator’s actions aimed at proper democratic legitimisation of the Council, the Constitutional Court found that it was impossible, in the present case, to recognise the contested norm as being void retroactively. A solution like this would be incompatible with the need to ensure sustainable national development and to protect public welfare. [24.3.]
The Constitutional Court held:
to recognise Para 2.11. of the Regulation of 2 December 2018 of the Financial and Capital Market Commission No. 198 “Regulation on Determining the Amount of Payments by the Financial and Capital Market Participants for Financing the Financial and Capital Market Commission in 2019 and for Submitting Reports” as being compatible with the first sentence of Article 91 of the Satversme of the Republic of Latvia.
The Constitutional Court’s judgement is final and not subject to appeal, it enters into force on the day it is published. The text in Latvian of the judgement is available on the homepage of the Constitutional Court: https://www.satv.tiesa.gov.lv/web/viewer.html?file=/wp-content/uploads/2019/05/2019-09-03_Spriedums.pdf#search=
Linked case: 2019-09-03