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Capital Markets Law Journal Advance Access originally published online on September 10, 2008
Capital Markets Law Journal 2008 3(4):425-457; doi:10.1093/cmlj/kmn026
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© The Author (2008). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Forms and paradoxes of principles-based regulation

Julia Black*
* Professor of Law and Research Associate, Centre for the Analysis of Risk and Regulation, London School of Economics and Political Science.

The first 150 words of the full text of this article appear below.


Key points

  • This article explores the political rhetoric and dynamics of principles-based regulation (PBR).
  • It distinguishes four forms of PBR: formal, substantive, full and polycentric PBR.
  • The article also identifies seven paradoxes which PBR may encounter. These paradoxes relate to interpretation, communication, compliance, supervision and enforcement, internal management, ethics, and trust.
  • It is argued, however, that unfortunately for detractors of PBR, using detailed rules alone does not necessarily resolve these paradoxes.

 

Only a year ago it seemed that ‘principles-based’ regulation was the answer that all policy makers and those running financial institutions had been looking for.1 The Financial Services Authority (FSA) had just issued its paper on how it would operationalize its approach to principles-based regulation (PBR) and the challenges that the FSA, firms and their advisers would have to meet to make the approach work.2 The EU Commission was trumpeting the benefits of a principles-based approach,3 although the FSA . . . [Full Text of this Article]


   1. Why have PBR?
 

   2. Three forms of PBR
 
Formal PBR
Substantive PBR
Polycentric/Networked PBR

   3. Paradoxes of PBR
 
Paradox 1: The interpretive paradox: principles can be general yet precise
Paradox 2: The communicative paradox: principles can facilitate communication but can also hinder it
Paradox 3: The compliance paradox: principles provide scope for flexibility in compliance yet can lead to conservative and/or uniform behaviour by regulated firms
Paradox 4: The supervisory and enforcement paradox: principles need enforcement to give them credibility but over-enforcement can lead to their demise
Paradox 5: The internal management paradox: PBR can provide flexibility for internal control systems to develop but can overload them
Paradox 6: The ethical paradox: PBR can facilitate a more ethical approach but it could result in an erosion of ethics
Paradox 7: The trust paradox—PBR can give rise to relationships of trust, mutuality and responsibility but these are the very relationships which have to exist for it to be effective

   4. Summary and conclusions
 

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