New Governance, Compliance, and Principles-Based Securities Regulation

Abstract

The UK securities regulator, the Financial Services Authority, claims that its principles-based approach to securities regulation is simply better than what it characterizes as the prescriptive, rules-based American approach. The striking shift in financial sector business from New York to London over the last two years has brought the question of the wisdom of principles-based regulation into sharp relief. In fact, an FSA-style regulatory approach may also be taking hold in Canada, through the agency of the province of British Columbia. This paper examines BC's innovative proposals for a principles-based securities regime through the lens of New Governance theory. I argue that the BC approach is significant in that its outcome-oriented, collaborative, pragmatic, and open-ended methods share features with promising New Governance approaches to regulation and public problem-solving more generally. Principles-based regulation is especially noteworthy with regard to firm compliance processes, because it seeks to engage firms in their own endogenous learning about compliance. Moreover, New Governance is a necessary complement to principles-based securities regulation. It provides a rational, systematic means through which industry learning and the input of third party stakeholders can fill in the content of otherwise vague principles. This paper identifies, and develops provisional responses to, some of the challenges arising from applying New Governance theory to the specific context of securities regulation. Those challenges include justifying imposing on industry the costs of articulating the content of principles ex post (as opposed to rules, which impose costs on regulators/legislators ex ante); reconciling light touch regulation with a rolling best practices rulemaking regime; confirming that industry has incentives to innovate, particularly in compliance processes; and identifying means for addressing capacity issues associated with requiring diverse industry actors to interpret principles for themselves.

Keywords: new governance, securities regulation, compliance, corporate governance, rules, principles, canada, tripartism, democratic experimentalism

JEL Classification: K22, K23, K30, G28, G38, L50, M14, D23, D73, D78