Abstract
In the past two decades, the trend in financial supervisory legislation was to replace detailed rules with more open ‘principles’. After the crisis, principles-based regulation was seen as part of the problem and it seemed that is was carried to its grave. The reality is less clear-cut, however. Financial supervisory legislation, as it stands today, remains a mix of detailed rules and open standards. Therefore, this chapter discusses whether the criticism of the principles-based approach was justified and to establish whether principles-based regulation contributes towards the desired market conduct and ‘good supervision’ of the financial sector.
The views expressed in this article are those of the author
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Black also points out that the battle between London and New York to be the world’s leading location for the financial sector was also instrumental in the rise of principles-based supervision. “PBR was a weapon in the fierce battle for business between London and New York.” (Black 2010, p. 12).
- 2.
Black (2010, p. 14). In his explanation to the Treasury Selection Committee, Lord Turner literally said “I think there was a philosophy of regulation (..) which was based upon too extreme a form of confidence in markets.” Source: Treasury Select Committee, Minutes of Evidence 25th February 2009, Lord Turner Response to Q2145.
- 3.
The Dutch government’s opinion on this subject is that: “It is the government’s task to ascertain to what extent (…) the responsibility for enforcing certain rules can be left to the institutions themselves.” Government Framework for Supervision, Parliamentary Papers II, 2005–2006, no. 15, p. 4.
- 4.
Also interesting in this context is the observation of Hartmann and Keupink (2011, p. 86) that “Current society [evidently] perceives (..) many risks and [evidently] wants to shift, or at least share, the related responsibilities.”
- 5.
FSA admits weakness of ‘principles-based’ regulation, IFAonline.co.uk.
- 6.
Article 3:8 Financial Supervision Act.
- 7.
The Dutch supervisors DNB and AFM have defined the term “suited” in more detail in the Policy Rule on Suitability 2012. See http://www.toezicht.dnb.nl/en/2/51-201878.jsp.
- 8.
In this connection Black (2008, p. 438) says: “(..) a regulatory regime is principles-based at the level of form if it contains norms which use simple general terms and which express the reason for the rule and if the norms are seen as expressing the fundamental obligations that all subject to them should observe.”
- 9.
See Black et al. (2007).
- 10.
In the literature this is also referred to as ‘meta-regulation’ or ‘management based regulation’. Parker and Lehman Nielsen (2011) use principles-based regulation and meta-regulation as synonyms.
- 11.
Black (2010, pp. 9–10) mentions the Financial Sector Assessment Program (FSAP) which assesses whether regulators meet the demands of ‘standard setting bodies’ as an example of polycentric principles-based regulation. “(..) it is through the network of principles (..) that regulators seek to regulate other regulators.”
- 12.
Black (2010, p. 34) also observes that “PBR can facilitate a more ethical approach but it could result in an erosion of ethics.” This could be the case because compliance officers and lawyers tend to exercise greater freedom in assessing risks. “When lawyers become risk managers they approach the task of managing compliance risks with non-compliance as a viable option.” The question is no longer “is this the right thing to do but are we likely to be able to get away with it.”
- 13.
Explanatory Memorandum Wft.
- 14.
Mertens (2012, p. 22) notes that in an ‘enforcement approach’ “the supervisor is always left with the ‘feeling’ that things are under control today, but will that still be the case tomorrow? Is the organisation aiming to achieve the objective or merely to apply the rules?”
- 15.
Black calls this the ‘interpretive paradox’ as the existence of all these different interpretations can compromise the principles-based character. See also Roth (2008), who says that supervisors often have internal differences of opinion about the interpretation of the standard, not to mention the legal validity of the interpretations.
- 16.
Hartmann and Keupink (2011) distinguish a duty of care in a ‘narrow’ and a ‘broad’ sense. They define a duty of care as a statutory obligation to perform or refrain from certain actions, thus ‘taking care’ to ensure that something does or does not take place.
- 17.
HR 31 October 2000, NJ 2011/14 (Krulsla).
- 18.
EHRM 22 November 1995, case 20190/92 (C.R of United Kingdom) legal ground 33–34, EHRM 15 November 1996, case 17862/91 (Cantoni v Frankrijk) legal ground 31–32 and EHRM 12 February 2008, case 21906/04 (Kafkaris v Cyprus) legal ground 139–141.
- 19.
Hartmann and Keupink (2011). See also Rb Rotterdam 9 June 2011, LJN BQ8039 (Inhout).
- 20.
- 21.
- 22.
Het Financieele Dagblad, 18 August 2012, p. 16. The distinction between ‘damaging’ and ‘illegal’ conduct is based on the ideas of Sparrow (2000) and is now widely applied in the day-to-day practice of financial supervision in the Netherlands.
- 23.
- 24.
Het Financieele Dagblad, 18 August 2012, p. 17.
- 25.
Black (2008) describes seven paradoxes: the interpretive paradox, the communication paradox, compliance paradox, the supervisory and enforcement paradox, the internal management paradox, the ethical paradox and the trust paradox.
- 26.
- 27.
The Basel principles as such have a principles-based character incidentally. Principle 16, for instance, ‘only’ prescribes that “The supervisor sets prudent and appropriate capital adequacy requirements for banks”.
- 28.
www.rechtspraak.nl: LJN BV9210, Rechtbank Rotterdam, AWB 11/2632 BC-T2.
- 29.
In this connection it should also be noted that, at least in the Dutch context, by no means all of the supervisor’s interpretations of a standard qualify as a ‘decision’ of the supervisor that can be put to the court. So the company will not always be able to take a difference of opinion with the supervisor to the court.
- 30.
See also May and Winter (2011).
- 31.
See also OECD Recommendation of the council on regulatory policy and governance: “Principles-based legislation is likely to be the most appropriate way of meeting policy objectives in complex or rapidly changing policy environments.” http://www.oecd.org/regreform/regulatorypolicy/49990817.pdf.
References
Basle Committee on Banking Supervision (1997) Core principles for effective banking supervision. http://www.bis.org/publ/bcbs30a.pdf
Black J (2008) Forms and paradoxes of principles-based regulation. Cap Mark Law J 3(4):425–457
Black J (2010) The rise, fall and fate of principles-based regulation. LSE working papers 17/2010, London School of Economics and Political Science
Black J, Hopper M, Band C (2007) Making a success of principles-based regulation. Law Financ Mark Rev 1(3):191–206
Grundmann-van de Krol CM (2010) Koersen door de Wet op het financieel toezicht. Boom Uitgevers, The Hague
Hartmann AR, Keupink BJV (2011) Enkele opmerkingen over de reikwijdte van de publiekrechtelijke aansprakelijkheid bij zorgplichten in de financiële toezichtwetgeving. In: Stijnen R, Kruisdijk R (eds) Zorgplicht en financieel toezicht. Kluwer, Deventer, pp 85–109
Kockelkoren Th (2011) Effectiviteit van de Wft. Speech given at the IFR symposium “De effectiviteit van het financieel toezichtrecht”, 17 Feb 2011
May PJ, Winter S (2011) Regulatory enforcement styles and compliance. In: Parker C, Lehmann Nielsen V (eds) Explaining compliance, Business responses to regulation. Edward Elgar, Northampton, pp 222–245
Mc Creevy (2008) Speech to the European Parliament ECON Committee (Committee on Economic and Monetary Affairs), Brussels
Mertens F (2012) Toezicht naar de kern? Gedrag en voorspellers van gedrag van organisaties vanuit het gezichtspunt van het toezicht. Tijdschrift voor toegepaste Arbowetenschap 2012(1):22–24
Parker C, Lehmann Nielsen V (eds) (2011) Explaining compliance, Business responses to regulation. Edward Elgar, Northampton
Roth GP (2008) Compliance een illusie? Over de kenbaarheid van de norm. In: Jurgens M, Stijnen R (eds) Compliance in het financieel toezichtrecht. Kluwer, Deventer, pp 131–1555
Sants H (2010) Reforming supervisory practices: progress to date. Speech. http://www.fsa.gov.uk/pages/library/communication/speeches/2010/1213_hs.shtml
Scheltema AH, Scheltema M (2009) Financieel toezicht in bestuursrecht en privaatrecht. Kluwer, Deventer
Simons, Th (2008) Commentary on Wellink et al. In: Waar is het de wet en waar het recht?, Nma, The Hague, p 236
Sparrow MK (2000) The regulatory craft. Brookings Institution, Washington, DC
Stijnen R (2011) Rechtsbescherming tegen bestraffing in het strafrecht en het bestuursrecht. Kluwer, Deventer
Viñals J, Fiechter J (2010) The making of good supervision: learning to say “no”. IMF Staff position note 18 May 2010
Wellink AHEM, Elderson F, De Vries F (2008) Waar is het de wet en waar het recht. In: Kalbfleisch P, Sinderen JD, Van de Ende N, Van Oers M (eds) Trust en anti-trust. Nma, The Hague, pp 229–239
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2013 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
de Vries, F. (2013). How Can Principles-Based Regulation Contribute to Good Supervision?. In: Kellermann, A., de Haan, J., de Vries, F. (eds) Financial Supervision in the 21st Century. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-36733-5_11
Download citation
DOI: https://doi.org/10.1007/978-3-642-36733-5_11
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-36732-8
Online ISBN: 978-3-642-36733-5
eBook Packages: Business and EconomicsEconomics and Finance (R0)