Blog Type, IPT Blog, Industry Sector, IPT, Ethics & Sustainability | January 2016

Rule of Law: Preservation or Erosion?

Enshrined in the Magna Carta, the Rule of Law has an influence that spreads across the world. The “super rule and rule number one in the lawyer’s handbook” is an overriding principle that promotes integrity, openness and transparency in the administration of law. It establishes that both common man and government minister have the same rights and liabilities.

The Rule of Law and Business Success

The Rule of Law and could indeed be argued as one of Britain’s finest exports. Lesser known is the positive role that the Rule of Law has upon businesses; for centuries businesses chose to settle and operate in the UK in the knowledge that the Rule of Law pervades into the commercial sphere. Businesses can operate in the comfort that an impartial judiciary exists.

Additionally, any investment opportunity represents risk as no one is placed to forecast business success. The Rule of Law represents a way to negate some of that risk. For example, property rights and enforceable contracts supported by remedies or sanctions applied by an independent, impartial judiciary are of immeasurable value to both the business and investor.

However the Rule of Law’s most prominent principles are at risk of being eroded, with this the subject up for discussion at the IPT event The Value of the Rule of Law to UK and Global Businesses. Linklaters LLP’s report In Defence of the Rule of Law provided a foundation for discussion, identifying five key issues that seem to be causing the erosion of one of the UK’s most valued principles.

1) The Excessive Power of the Executive

Executive power has grown to the point of being unaccountable; regulatory bodies act as agents of Government in enforcing rules but their power is relatively unchecked and unaccountable. In addition, Parliament has devolved some of its capability to hold Government departments to account. S.75 of the Banking Act 2009, with noble intention, gave the Treasury the power to “dis-apply or modify” any past or future enactment, rule or law without Parliamentary consultation. While intended as a means for swift action to prevent the defaulting of British banks, it now serves as an example to a department or Minister wielding power beyond the scope of the Rule of Law.

2) Retrospective Legislation

New legislation creates a mire of shifting standards, a constant movement of the goalposts with vague laws and regulations used to attack conduct in retrospect. In defence of bankers, post-Global Financial Crisis standards and morality have been retrospectively applied from an “enlightened prism of propriety” on the “Buccaneering behaviour that several years ago was tolerated even encouraged.”

3) Uncertainty in Regulation

Owing to their flexible nature, regulation based on principles create uncertainty for businesses, particularly so in vast and blanket regulations that aim to steward “compliance.” Principles-based regulation as employed in a number of industries aims to remove the “box-ticking” nature of compliance and introduce principles based compliance. In doing so, regulations and vague principles create uncertainty.

4) Unmanageability and the Volume of New Law

New laws introduced in the UK exceed 2,000 articles per year. Entire departments exist to digest the vast amount of law, regulations and guidance in large organisations and law firms, putting the individual and small business at a significant disadvantage. Any new “Red-Tape” is facetiously met with glee by the larger firms in the UK, who recognise that it stifles the innovation and competitiveness of the smaller business.

5) Changing the Burden of Proof

“Innocent until proven guilty” is perhaps the most well-known idioms of English Law, with an element of fault seen as an essential component to a crime. However the law is changing to reflect “probability” of wrongdoing, rather than being “beyond reasonable doubt.” The offence of market abuse, as in the Financial Services and Markets Act 2000, can impose unlimited fines based on the “balance of probability”. Additionally, in the Bribery Act 2010, the defendant business has to prove “adequate procedures” were in place in the name bribery prevention rather than the prosecutor, creating a vast scope for a business to manufacture its own innocence.

Assisting the Small Business

The nature of English law is conducive to change; as one of the few jurisdictions worldwide without a codified constitution our laws, regulations and standards often change from generation to generation leading thinkers to coin the term “a constitution in flux” with reference to the precipitous nature in which the UK can amend historic legislation.

What is sure, as fleshed out during the discussion, is that small businesses are not equipped to fully comprehend both the volume and scope of new laws drafted each year. If legislators have more power than those who fall beneath its remit, the Rule of Law has failed. The high-street and the UK’s small businesses will need assistance in the future in understanding legal ramifications of decisions if they are to remain the backbone of British industry.

Word by Alex Smith, Communications Officer.

With thanks to the event's Chair and Speaker: The Rt Hon. the Lord Hunt of Wirral MBE; and Richard Godden, Senior Partner, Linklaters LLP