Rule of law is under threat from regulations

International investors looking to the UK have many motivations but a key attraction of our country is the reputation of our legal system for integrity, certainty and fairness. In other words, for the rule of law.

Yet when I talk to many clients who are based here or who are seasoned investors in the UK, I increasingly sense their frustration in having to contend with a system that falls short in the delivery of clear rules and regulations and in the transparent and even-handed imp-le–mentation of those rules. We are in far better shape than many other countries but that is not the point.

Linklaters has identified five key threats to the rule of law within a business context. Successive governments have promoted legislation and regulation that:

• gives excessive discretionary powers to the executive and regulators;
• is retrospective;
• is unclear and uncertain;
• is unmanageable;
• and imposes penalties even when those concerned have not been proved beyond reasonable doubt to have done wrong.

The result is that the very foundations of the rule of law in the UK are weakening, which could threaten the country’s long-term investment appeal.

Five threats

Let’s consider the five threats. The Governmental, regulatory and law enforcement authorities must have sufficient powers to perform their functions. But the rule of law should impose limits on such powers. It requires that law-making be clearly separated from the executive and law enforcement functions. Yet, broadly-drafted new legislation goes well beyond the scope of und-er-lying problems and leaves the prosecuting authorities to decide what to criminalise in practice.

Consider the Proceeds of Crime Act 2002, which was meant to help thwart money laundering but also may cover teenagers who are given pirated music; the increasingly large regulatory fines that seem based on no understandable scale proportionate to the seriousness of the offence; and perhaps most pernicious of all, section 75 of Banking Act 2009, which gives the Treasury the power to disapply or modify the effect of any law – yes, any law – without Parliamentary approval.

The rule of law demands that no-one should be able to decide tomorrow that the law be changed so as to render illegal what I have done today. However, recent years have seen retrospective tax legislation and a similar effect is produced by vague laws and regulations that allow shifting standards to be app-lied retrospectively to attack conduct previously not regarded as wrong. We’ve seen plenty of examples where a post-global financial crisis morality has been applied to behaviour previously deemed acceptable.

“A renewed sense of purpose in protecting the rule of law is in everyone’s interests”

 

Although some degree of uncertainty is inevitable, everyone should have access to authoritative and public sources of the law and regulation. Unfortunately, the real reality is very different: the Bribery Act 2010 creates the offence of failing to prevent bribery, but does not explain what “adequate procedures” are acceptable as a defence against this crime; “principles-based regulation” in the financial services industry makes it difficult for a business to be confident it is complying with regulatory obligations; and the Data Protection Act 1998 requires that information is processed “fairly” but does not def-ine this term – particularly worrying given that proposed revised Eur-opean legislation in this area will increase penalties for breaches to 2-5 per cent of a company’s global turnover.

Undermining the rule of law

Those who are subject to laws need to be able to understand what is exp-ected of them and with the huge volume of new laws and regulations that emerge every year,  well over 2,000 per year over the past two decades, the question of whether we have reached the point of diminishing returns becomes pertinent. Do the torrents of new laws undermine the very objectives that they are seeking to achieve? Indeed, is this undermining the rule of law itself?

“Everyone is innocent until proved guilty”; “You can only be convicted if proven guilty beyond reasonable doubt”. Most people will imagine that these statements remain bedrocks of English law but the reality is different. Under the Financial Services and Markets Act 2000 many offences (e.g. market abuse) need only be proved on balance of probabilities and then unlimited fines may be imposed. Und-er the Bribery Act 2010, it is for a business to prove that it has “adequate procedures in place”, not for the prosecutor to prove that procedures were inadequate.

Some may argue that there are reasons for all these issues. Unpredictable powers are needed to cope with unforeseen problems; secondary legislation is quicker and cheaper than statute law; retroactive legislation is needed to cope with fast moving situations; principles and guidelines are more useful than rigid tramlines; and changing the burden of proof is necessary to catch crooks and raise standards. Of course, there is some truth in all these claims. But we should recognise them as the start of the argument rather than its conclusion.

As the 800th anniversary year of the Magna Carta draws to a close, we should hold on to the sense of purpose that the Magna Carta’s legacy has rekindled.

Now is a good time to take stock of the integrity, fairness and certainty that the rule of law brings to the UK and to those who choose to invest or live in this country. A renewed sense of purpose in protecting the rule of law for the benefit of this and future generations is in everyone’s interests. It should not be the preserve of anniversary years but an enduring and constant priority.

Richard Godden, partner, Linklaters