On the rule of law

One of the things that definitely comes out of studies on what produces economic growth is that the rule of law is a necessary but not sufficient condition for there to be sustained economic growth.

If contracts can be torn up at bureaucratic or political whim then investments tend not to be made because of those bureacratic or political risks. The way that BP was shafted over TNK, Shell at Sakhalin, they\’re poster boys for not investing in Russia (as someone who has either worked in Russia or had interests there for near two decades now I still wouldn\’t invest in physical plant there for this very reason, legal uncertainty).

So, what about London then?

In an extraordinary ultimatum that has shocked some of the City\’s biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict.

Many of the global players have in recent weeks made representations to the City watchdog, in particular about pre-existing employment contracts that guarantee bonuses over a year or more. But their appeals have been met with the FSA\’s toughest yet response.

The FSA is saying that unless the banks breach their own contracts they\’re at risk of having their banking licences pulled.

This is putting bureaucratic action above the rule of law.

Whether the actual proposal itself is a good idea or not isn\’t the point here at all. The breach of that rule of law, the way in which a political appointee can take it upon himself to over rule entirely legal contracts is going to casue much more damage in the long run than any effect of the details of the regulation itself.

Bad, bad idea.

14 thoughts on “On the rule of law”

  1. No, they are leaving it to the banks to get sued.

    If I were a big famous bank, I’d call their bluff. “Go on, shut down the accounts of millions of voters, why don’t you?”

  2. The Financial Services industry is a massive bureaucracy you know,profiting from the work of others,while sitting in offices skimming flows of money that the State has decreed goes their way.The sooner the City is loosed from its moorings in London and floats off out to sea the better.

  3. It’s too late. Anyone trying to hire permanent IT staff in the City will tell you that – everyone with good skills is either moving overseas or taking contract work.

    Attrition rates are about to go through the roof.

  4. Sorry, your article has the wrong end of the stick. The FSA is promoting this rule for very good reasons. The bonus culture at the big banks led us all astray and has cost us all a packet. It needs to be restrained.

    What the FSA is saying is that if you want to have a banking licence in the UK, you have to comply with this rule.

    If a bank has entered into complex contracts that would not comply with the rule, that is the bank’s problem. The FSA is not cancelling these contracts, which remain legally effective. It is simply telling the banks that they have to negotiate their way out of them or breach them and pay damages. If they do not, they will lose their licences.

    To be fair, this is a rule-change with retrospective effects. Good regulators normally try to avoid that type of rule-change, but sometimes it is impossible.

    As for the bankers with existing contracts, they will lose nothing. What they lose in pay, they gain in damages. Unless of course, their employment contracts have a “change of law” clause that allows the bank to withhold money if a regulator so requires. In which case, they already agreed to this.

    And in any case, those bankers should be dead grateful that you and I are paying their fat wages from our taxes, and quit whining.

  5. Absolutely, Tim, this is a breech of the Rule of Law.

    It is not unexpected to me. The control-freak mentality took advantage of (encouraged? pushed?) the intervention in, insuring and bailing out of banks so as to get their fingernails into their operations for a wide range of reasons, few of which, I suspect, will eventually be proven to be benign.

    These measures are bootstrapping in further excuses and faux justifications for control and social engineering.

    The constant push of “bonus culture” as being the “reason” behind the problems is a typical case of “LOOK! OVER THERE!!!”.

    The real underying problem – unresolved IMHO – is that of the ratings agencies who gave misleading information in exchange for fat commissions. Dodgy products were given AAA ratings allowing banks like Northern Rock to sell on over and over without eroding investment capital (you could sell £1m lent for near £1m if AAA I am sure, but if you tried to sell £1m of BBB-, watch how you soon run out of money to lend…).

    It is the ultimate cowardice to expect individuals, let alone employees, to engage in recovering damages because of third party retrospective bureaucratic fiat. I am sure the lawyers will love it. How much wealth will be eroded in non-productivity I wonder?

    Retrospective law changes are not “impossible to avoid”. Ideally the State should never have been bounced into buying the shares by the Labour Administration. Lloyds should never have been bounced into buying RBS so as to protect the ego of the PM*.

    The Taxpayer is not actually “paying their fat wages”. Even if it were, the best way to stop doing that is to, shock horror, sell the shares. Better to have never bought them and seen Lloyds remain fit, Barclays carry on doing what it did, HSBC not requiring anything and in the implosion of RBS see NatWest leap from the falling elevator.

    * I almost said “our PM”, but that is like saying a dog turd I just trod in was now “mine”.

  6. Brian, follower of Deornoth

    I propose a rule change with retrospective effect; that 50% of all public-sector pensions be forfeit.

    The grotesque rapacity of the public sector led us all astray and has cost us all a packet. It needs to be restrained.

    And in any case, those civil servants should be dead grateful that you and I are paying their fat wages from our taxes, and quit whining.

  7. “The bonus culture at the big banks led us all astray and has cost us all a packet. It needs to be restrained. ”

    Rather than spewing hackneyed cliches you heard from Robert Peston, why not think for yourself. You could start by explaining what the financial crisis was. Then when you’ve done that, you could explain what bonuses have to do with anything.

  8. It’s pretty simple Kay Tie, when push came to shove the banks didn’t have enough money. No other company would think that had nothing to do with the level of salaries they pay.

  9. Of course it’s against the law, but when did that ever worry our leaders?

    As today’s latest news on the vile MPs expenses scandal has shown, our leaders are above the law, it just doesn’t apply to them – if it did many of them would now be facing criminal charges for fraud, tax avoidance.

    No law for them, plenty of laws for us.

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