depends on firms to adopt an attitude to the regulatory
regime (which is one which aims to go beyond mini-
mal compliance with redes).”138
Principles based regulation is not only advantageous
because it allows management of a bank or firm to take
into consideration the substance of transactions, but
because “principles impose outcomes to be achieved—
not detailed processes for achieving them.”139 As well
as being linked to meta regulation, principles based
regulation facilitates a system whereby principles “com-
municate regulatory objectives and promote behaviour
which will achieve those objectives.”140
Principles based regulation, thus, would not only
reduce the scope for “creative compliance”—since the
substance of transactions should be considered by man-
agement, but also has the benefit of providing a more
flexible and responsive approach to regulation as the
subsequent section will seek to demonstrate.
Principles based regulation is considered to comprise
of 3 elements, namely:141
• A particular type of ride
• A focus on outcomes and
• A focus on senior management responsibility in
ensuring these outcomes are achieved
Furthermore, three forms of principles based regu-
lation, namely: “formal principles based regulation;
substantive principles based regulation and ftdl prin-
ciples based regulation”, have been suggested.142 For
the purposes of this paper, focus will be restricted to
substantive principles based regulation.
Five classes of regulatory practices which could charac-
terise substantive principles based regulation include:143
“The particular mode of interpretation- that is,
the approach taken in the interpretative process;
particular enforcement style; an orientation to
outcomes; a relocation of responsibilities for
working out the practical application of the pro-
visions; and an explicit and developed reliance on
ɪmnagement based regulation.”
The effectiveness of rules and regulation is depen-
dent, not only on the monitoring processes and tools
used in such processes, but also the effectiveness of
the enforcement of those rides. For this reason, focus
will be dedicated to the second characteristic of sub-
stantive principles based regulation— which is indeed
a “critical” and defining feature of principles based
regulation.
According to Black, the adoption of the “respon-
sive” enforcement approach is justified on the basis that
“neither negotiative approaches nor deterrence based
approaches are effective on their own and that instead,
regulators should implement a mixture of both, that
is, first negotiate, then if the firm still does not deliver
substantive compliance, regulators should gradually
move up the enforcement pyramid, applying sanc-
tions of increasing severity until it does.”144 She adds
weight to Baldwins argument145 by stating that “those
who know what they are meant to be doing and are
generally inclined to do it (“the well intentioned and
well informed”) , are best dealt with using a negotiat-
ing strategy-'—which is easier to do using principles. In
contrast, those who do not know what they are meant
to be doing and even if they did, would not be inclined
to do it (“the ill intentioned and ill informed”), are best
dealt with using a strategy that escalates rapidly up the
enforcement pyramid.”146
This “responsive” approach, it is further argued, “is
not contingent on any particular rule design and can
operate in systems of (i) highly detailed rules, (ii) where
the rules are mainly principles, (iii) where there is a
combination of both.”147
Having considered the forms, attributes and benefits
of principles based regulation, the weaknesses inher-
ent in this type of regulation are worth mentioning.
Firstly, in relation to the all important aim of ensuring
accountability—which should be fostered if adequate
monitoring procedures are observed and carried out
by the responsible levels of authority. Principles based
regulation could serve as a hindrance towards ensuring
accountability. In this respect, reference will be made
to the seven paradoxes of principles based regulation—
which are as follows:148
“(i) The interpretative paradox : Different interpre-
tations attributed to principles could result in
imprecise and general terms being accorded very
specific interpretations—even though principles
40 ∙ Banking & Financial Services Policy Report
Volume 30 ∙ Number 9 ∙ SeptemberlOII