Private Enforcement and EU Market Abuse Regulation: A Discussion on Direct (Class) Actions and Derivative Actions

Abstract

Within the past decade, the EU has made significant steps in strengthening and harmonising the legal framework of capital markets. Despite passing and amending secondary legislation on this topic, it only partially addressed the issue of enforcement, leaving private enforcement an issue for its Member States to regulate, almost in its entirety. At Member State level, however, there is considerable diversity regarding the law on investors claims for compensation or damages for infringement of securities law, the national frameworks being still at the early stages of development; particularly concerning collective redress mechanisms. Drawing insight from several EU Member States and the U.S., this study identifies the no-reflective loss principle as a crucial determinant in the development of (collective) private enforcement. Its application dictates the permissible type of action, claimant's legal standing and scope of defendants. To a great extent, it determines the effectiveness of the system in addressing different forms of externalities. It is argued that for the rules on market abuse to have a real bite (from the perspectives of compensation and deterrence), alongside criminal and administrative sanctions must operate a functioning framework of civil claims, that provides investors with the ability to litigate not only their direct losses collectively, but also their reflective ones, derivatively.

Keywords: private enforcement, harmonization, compensation, damages, representative/collective litigation, collective redress, no-reflective loss, derivative action, Regulation 596/2014, reflective losses, direct losses, market abuse, civil liability, direct (class) actions, breaches of securities regulation

JEL Classification: K22, K41, K42, K13