In October 2021, a significant study was published looking into how the Rome II Regulation has, since its introduction, been working across the EU Member States. One aspect which will be of interest to financial market participants will be comments on Rome II’s fitness for purpose in prospectus liability claims and other financial markets torts. Although reform may be a long way off, it is possible that, in this study, lie the seeds for a more uniform approach in such claims.

The Rome II Regulation is a set of rules which, in the EU courts (and those in the UK, which applies a “retained” version of Rome II) determines what law applies, in cross-border cases, to a non-contractual claim. It is common for the European Commission to formally report on the operation of such legislation and make proposals for reform. 

In order to help it in this process, the Commission appointed the British Institute of International and Comparative Law (“BIICL”) to conduct a study which considered the workings of Rome II during 2010-2020. BIICL’s completed study was released in October 2021 and largely consists of data from, and analysis of, a legal study (considering decisions of the Court of Justice of the European Union, the “CJEU”, and reports from each individual Member State and the UK) and an empirical study (based on a questionnaire sent to stakeholders). 

Non-contractual claims (e.g., in tort/delict), by end investors, against issuers of securities for defects in offering documentation, have presented something of a vexed issue under Rome II. Responses in the study reflect this and, to a degree, suggest a way forward. 

Before turning to the study, it is worth briefly considering what the conceptual difficulties have been in applying Rome II to financial markets torts. In short, generally, it is accepted that, in such a  claim, the applicable law would fall to be determined by Rome II’s “general” rule in Article 4(1), that of the place which the damage occurs (“…the law applicable to a non-contractual obligation arising out of a tort/delict shall be the law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur.”). Broadly speaking, this then gives rise to two challenges. 

• First, identifying where that place is. In that respect, there are CJEU decisions – on an analogous provision in the Brussels I Recast regulation[1] - which placed weight on claimant-led factors (such as where the claimant’s bank account in which the loss was suffered was located) with the result that the claimant’s home jurisdiction was identified as the relevant place. 
• Second, even if such factors are not wholly determinative of the point (in its latest ruling, C-709/19 - Vereniging van Effectenbezitters, the CJEU held that the direct occurrence in an investment account of purely financial loss does not allow the attribution of international jurisdiction on the basis of the place in which the damage occurs where the defendant was not subject to statutory reporting obligations in the relevant Member State) the overall approach requires an assessment on a claimant by claimant basis. 

So, in the context of a single issuance, non-contractual claims might be governed by a multitude of different laws. This causes uncertainty for issuers, and can lead to disparities between claimants’ chances of success and their ability to act as a class. 

In BIICL’s study, the key passage  as regards prospectus liability and other financial markets torts is in its Synthesis Report, which notes that, in respect of Article 4, the doctrine in several Member States suggests the introduction of a special conflict rule for financial market torts “designating the law of the country where the affected financial instrument is traded”.[2] This is a conclusion that the study derives from its country-by-country reports, a number of which consider difficulties with the application of Article 4(1) to financial markets torts.[3] It appears, however, most strongly influenced by the German report which notes that this is the suggested solution of the German Council for Private International Law and gives several reasons for Article 4(1) otherwise being problematic in this context , including that: 

“the localisation of financial loss is difficult, and also, any localisation involving investor-specific criteria (such as the place of the investor’s habitual residence or the place of establishment of the bank managing his account), would lead to a fragmentation of the applicable law to the liability for a single financial market tort, e.g. misrepresentation in a prospectus”.[4]

The study’s empirical research also shows some broader support for reform in the area with Article 4 being the article to which respondents would most like to see improvements,[5] and with nearly a quarter of respondents selecting “prospectus liability” in reply to a question on where specific rules might be needed.[6] 

BIICL’s study will help inform a formal report by the Commission on Rome II. If that report adopts the BIICL’s observations, then that would be the first step on the way for inclusion of a specific rule in any recast of Rome II. All of that, of course, will not happen overnight, but it is a hopeful sign, for those valuing certainty in financial markets, that the issue has been put on the agenda. From the UK’s perspective, the workings will be somewhat different. Whilst the UK is a jurisdiction which is covered by the study (as it was a Member State during the relevant time), any changes to Rome II as “retained” will be for it to consider in the light of the extent to which it chooses to cleave to the development of that instrument within the EU.

The BIICL study is available here. 

Stephen Lacey, Counsel in London, and Michael Munk, Managing Associate in London
 

[1]  Regulation (EU) 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgment‘s in civil and commercial matters (recast). 

[2]  See page 34. 

[3] See, for example, Austria at pages 104-105, France at pages 223-224, Italy at pages 316-317; and the Netherlands at page 396.

[4] See pages 33 and 239. 

[5] See page 723.

[6] See page 767.