Abstract
One of the arguments frequently used to limit the liability of financial supervisory authorities is the idea that normal liability rules result in defensive conduct and, therefore, in ineffective financial supervision. The impact of tort law on financial supervisory authorities is, however, highly debated, and no overwhelming empirical evidence exists to support it. This article presents findings from an empirical study on financial supervisors in the member states of the European Union. Targeting senior financial supervisors, the survey presented a series of statements, asking respondents to state their opinions about the impact of financial supervisory liability. In summary, most of the respondents seem to classify the impact of financial supervisory liability as neutral or positive. At most, the evidence from the survey implies an arguably modest degree of deterrence. Because the survey found no significant differences between respondents who perceive the liability of their organization as limited and those who do not, it suggests that limiting financial supervisory liability does not have an impact on the behavior, or at least on the perceptions of the impact of financial supervisory liability, of financial supervisors. Therefore, the study calls into question the widely accepted argument of defensive conduct as a reason for limiting the liability of financial supervisory authorities.
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Notes
In some countries the State (for instance in France) or the Ministry of Finance has to be held liable instead of the financial supervisory authority itself.
The revised principles of September 2012 (Basel Committee on Banking Supervision 2012) still contain the principle of legal protection for supervisors and their staff (Principle 2).
Most recently, in 2012 the Netherlands changed the liability regime of their financial supervisory authorities, the Dutch Central Bank (DNB) and the Financial Market Authority (AFM), by limiting their liability to cases of gross negligence or bad faith.
In this paper normal liability rules are defined as negligence and no-fault.
To my knowledge, van Dam (2006) is the only one who has undertaken limited empirical research regarding the impact of liability that included financial supervisory authorities. Based on a short questionnaire and interviews with Dutch supervisory authorities, including the Dutch financial supervisors who, at that time, were bound to normal liability rules (negligence), van Dam (2006) mentioned that, according to the statements of the supervisors, there was no indication for defensive conduct. Supervisors did, however, mention that they would include the outcome of court decisions in their policies in order to improve the quality of their supervision. van Dam (2006) mentioned, furthermore, that none of the supervisory authorities asked for a limitation of supervisory liability.
The economic analysis of public authority liability starts by taking the traditional economic model as a reasonable account of the way in which the tort system affects the private sector. The question, however, is to what extent the traditional economic model can be used for public authorities, as their objective, unlike those of corporations, is not profit maximization. Some scholars have therefore argued that the traditional economic model of tort law cannot be applied to public authorities (Levinson 2000; Schäfer 2012). Others have argued that public authorities face budget constraints that could result in a more or less similar response to liability as corporations (e.g., Niskanen 1971; Rosenthal 2006). This latter perspective is an application of the rational-choice model of bureaucratic behavior that assumes that a bureaucrat will seek to maximize the size of her agency’s budget. One could claim that, whatever underlying behavioral model one uses to characterize public authorities, public liability imposes some (political) costs upon these authorities that create incentives to prevent misconduct (Dari-Mattiacci et al. 2010).
See fn 5.
This definition has been derived from the definition of defensive medicine as used by Hauser et al. (1991). It is furthermore interesting to note that when discussing the concept of defensive conduct as a result from liability, defensive conduct itself might also result in liability. This is most likely the case when supervisory authorities engage in fewer activities and, as a consequence, fail in performing their supervisory tasks.
This also relates to the distinction made between care-level deterrence and activity-level deterrence, where the first concerns the degree to which a potential tortfeasor exercises care, and the second concerns the extent to which a potential tortfeasor engages in an activity that creates tort risks even when done carefully (Shavell 1980).
In addition, thoroughness in performing financial supervision can also be impacted by differences in mandates of financial supervisory authorities.
See, for instance, the Supreme Court of the Netherlands in the Vie d’Or case. In order to determine whether financial supervision complies with the standard of reasonable care, all circumstances of the individual case have to be taken into account. These circumstances are the ‘nature’ of financial supervision: the fact that financial supervisors have discretionary powers in order to fulfill their supervisory duties, and the fact that financial supervisors face the difficult task of taking into account both the interests of the supervised institutions and society (supervisors’ dilemma).
Some financial authorities can, in theory, initiate recourse actions against individual supervisors in case they have been found liable by courts. This could provide individual supervisors incentives for taking adequate care.
See Dijkstra (2012) for an overview of the financial supervisory liability regimes in the European Union.
A preliminary survey was designed and tested by two financial supervisory authorities, namely, the Croatian National Bank and the Norwegian Financial Supervisory Authority. The helpful comments and recommendations I received from those two authorities were used to finalize the survey. For the complete survey, refer to Appendix 1.
If financial supervisors don’t believe that their organization can be held liable, it is unlikely that (the threat of) liability has any impact at all on their behavior.
To examine whether there are any statistically significant differences between financial supervisors who perceive the liability of their organization as limited and those who do not, I performed a Mann–Whitney U test. The Mann–Whitney U test is a non-parametric test used to determine if a difference exists between two groups.
These eight statements cannot be considered as a scale of defensive conduct and need, therefore, to be judged individually.
The intermediate steps include ‘Agree’, ‘Neutral,’ and ‘Disagree’.
Because the survey was conducted in the period May–July 2013, Croatia, which became the 28th member state of the EU as of 1 July, was not included. In this study, financial supervisory authorities are defined as organizations performing the public law task of financial supervision in one or more of the following areas: banking supervision, insurance supervision, pension supervision, and securities supervision. For an initial overview of these authorities, see Dijkstra (2012).
Members of the executive board, directors, and managers of financial supervisory authorities are those most likely to make the most important decisions and shape internal policies.
See www.limesurvey.com.
The response rate may be relatively low, but it can be argued that the specialist nature of the group being surveyed does not lead to bias in the results: see Leslie L., ‘Are high response rates essential to valid surveys?’ (1972) 1 Social Science Research 323. Moreover, it should be noted that this response rate could be considered normal and adequate with respect to online surveys amongst a widely differentiated group.
The median number of responses per member state was 4 (min = 1, max = 11), while the median number of responses per financial supervisory authority was 2 (min = 1, max = 11).
The three financial supervisory authorities that did not respond were the French Prudential Supervisory Authority (Autorité de Contrôle Prudentiel), the Luxembourg supervisory and regulatory authority of the insurance and reinsurance sector (Commissariat aux Assurances), and the Bank of Spain (Banco de España).
The survey did not collect any other answers from respondents who believed that it was not possible to hold their organization liable.
The data set of 105 respondents reflects 27 member states and 43 financial supervisory authorities. The complete data package (n = 119) reflects 27 member states and 44 financial supervisory authorities.
There are no significant differences among the characteristics of the respondents in the data set (N = 105) and the total number of respondents (N = 119). Furthermore, a Kruskal–Wallis test based on the respondents’ roles in the organizations revealed no major differences in the answers.
In addition to the Mann–Whitney U test based on the independent survey variable “Are there any limitations of financial supervisory liability that you know of” (Table 10), I have carried out two Kruskal–Wallis tests to control for national variation and variation based on liability regime. The first Kruskal–Wallis test was based on the independent survey variable “In which county are you located” (control for national variation). This test showed no statistically significant differences between the different countries. Next, using earlier research (Dijkstra 2012), I categorized each financial supervisory authority into one of the following liability regimes: “no-fault”, “negligence”, “gross-negligence” or “immunity”. Based on this classification, I carried out a Kruskal–Wallis test which also showed no statically significant differences. Both tests confirm the overall outcome of this study.
Based on Table 12, it is not likely that the ‘floodgates’ argument, often used by opponents of applying normal liability rules, and, that is frequently connected to the idea of defensive conduct, holds ground.
It should be noted that the threat of institutional liability could, to a certain extent, be transferred to employees through its negative impact on reputation. This reputation damage could impact the career opportunities of financial supervisors. Furthermore, some financial authorities can, in theory, initiate recourse actions against individual supervisors in case they have been found liable by courts. This could provide individual supervisors incentives for taking adequate care.
An explanation of these differences can also be based on behavioral insights, especially the availability heuristic. People tend to think that risks are more serious, when an incident is readily called to mind or ‘available’ (Sunstein 2000).
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Acknowledgments
I wish to thank all the participants of the internet survey. Special thanks to Jurgen Braspenning who constructed the survey website and Alicia Novoa for help with the survey preparations. Furthermore, I would like to thank Maurits Barendrecht, Machteld de Hoon, Vincent Buskens, Louis Visscher and three anonymous reviewers for helpful comments on an earlier version of this paper.
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Appendix 1 European Survey on Financial Supervisory Liability
Appendix 1 European Survey on Financial Supervisory Liability
Part I:
Question 1: In which country are you located?
Question 2: To which organization do you belong?
Question 3: What is your role in the organization?
Question 4: How long have you worked for this organization?
Question 5: In what category of financial supervision are you active?
Question 6: Is it possible to hold your organization liable based on shortcoming in performing financial supervision?
Part II:
Question 7: Has your organization been held liable in the last 5 years?
Question 8: How often has your organization been held liable in the last 5 years?
Question 9: Who has held your organization liable?
Question 10: How often has a court established liability and sentenced your organization to pay-out compensation for damages in the last 5 years?
Question 11: Are there any limitations of financial supervisory liability regarding your organization, that you know off?
Question 11a: Please describe what kind of limitations is (are) in place with a reference to specific legislation or case-law.
Statement 1: I view every supervisory decision/action as a potential lawsuit for my organization
Part III:
Statement 2: Financial supervisory liability cases have changed our internal policies regarding the way we perform our supervisory tasks
Statement 2a: The changed internal policies improve the effectiveness of our financial supervision
Statement 2b: The purpose of the changed internal policies is to mitigate the risk of a future law suit
Statement 3: The existing threat of supervisory liability results in less supervisory activities than desired
Statement 4: Every supervisory decision has to be checked with out legal department (internal or external) before being announced or published
Statement 4a: The involvement of our legal department increases the quality of our financial supervision
Statement 4b: The involvement of our legal department prevents us from reacting fast when that is required
Statement 5: The existing liability regime has a positive impact on the quality of financial supervision
Statement 6: The existing liability threat results in more careful supervisory decisions
Statement 7: I don’t see any concrete impact of a threat of financial supervisory liability on the supervisory activities of my organization
Statement 8: Our organization would be more effective without the threat of liability
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Dijkstra, R.J. Is limiting financial supervisory liability a way to prevent defensive conduct? The outcome of a European survey. Eur J Law Econ 43, 59–81 (2017). https://doi.org/10.1007/s10657-015-9484-1
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DOI: https://doi.org/10.1007/s10657-015-9484-1