are supposed to offer flexibility (where these are
characterised by imprecise terms).
(ii) The communicative paradox: Principles, whilst
facilitating communication, could also hinder such
communication. The paradox is attributed to the
distinction between legal use of language and its
ordinary use.
(iii) The compliance paradox: Principles provide scope
for flexibility in compliance—however this could
result in conservative and/or uniform behaviour by
regulated firms.
(iv) The supervisory and enforcement paradox:
Principles require enforcement to provide them
with credibility—however over-enforcement could
result in their demise.
(v) The internal management paradox: Principles based
regulation has the potential to offer required flex-
ibility for internal control systems to develop—and
also the potential to overload them.
(vi) Ethical paradox
(vii)Trust paradox
A detailed consideration of the above mentioned
paradoxes Iiighliglits the importance of having a clear
understanding of the form of principles based regula-
tion which is applicable to a particular bank or business.
As highlighted under the substantive principles based
regulation, “those who know what they are meant to
be doing and are generally inclined to do it ( the well
ɪntentɪoned and well informed), are best dealt with
using a negotiating strategy.” Hence a more draconian
mode of enforcement , that is tougher sanctions, would
not be best suited in facilitating compliance by such
groups—such sanctions being better reserved for the
“ill informed and ill intentioned.” Furthermore, a tough
punitive regime is one in which principles are unlikely
to survive—even though detailed rules could still be
implemented under principles based regulation.149
Hence the desired level of compliance required within
a firm is best achieved having regard to the organisational
structure which exists within an organisation—and
to whether (as a result of a such determination), that
organisation could be considered a suitable candidate
for the application of principles based regulation. Clear
delegation and segregation of duties within an organisa-
tion would not only promote accountability, but would
also facilitate a system where principles could be applied
and also facilitate monitoring procedures. Consequently,
monitoring would also facilitate accountability—since
frequent reviews and discussions between manage-
ment and appropriate personnel should increase an
understanding of the activities carried out by particular
divisions within the organisation.
H. CONCLUSION
Monitoring fosters transparency, which in turn
fosters accountability. Monitoring of key risks, as
well as periodic evaluations by the business lines and
internal audit constitute a vital element of corporate
governance—hence the overall effectiveness of a banks
internal controls should be monitored on an ongoing
and frequent150 basis.151
Since it is possible for detailed rules to operate
under principles based regulation—and since detailed
rules constitute a vital element in ensuring that clear
delegation and segregation of responsibilities exist
within an organisation, it could be said that the level
of accountability derived under principles based
regulation is dependent on the form of principles
based regulation. Under the formal principles based
regulation, the level of accountability derived is likely
to be greater than that derived under full principles
based regulation. As highlighted within the relevant
sections of this paper, an approach which combines
negotiating and punitive strategies is always considered
best—owing to the level of flexibility offered by such
an approach. However the organisational structure,
culture and several other factors require consideration
before substantive principles based regulation is judged
to be the optimal approach.
In accordance with Principle 13 of the Principles for
the Assessment of Internal Control Systems, “supervi-
sors should require that all banks, regardless of size, have
an effective system of internal controls that is consistent
with the nature, complexity, and risk inherent in their
on- and- off balance sheet activities and that cor-
responds to the bank’s environment and conditions.”
Furthermore, “in those instances where supervisors
determine that a bank’s internal control system is not
adequate or effective for that bank’s specific risk profile,
they should take appropriate action.” In accordance
with Core Principle 17 of the Basel Core Principles
for Effective Bank Supervision, Internal controls and audit,
specific attention should given to ensure the existence
of: (i)uclear arrangements for delegating authority
Volume 30 ∙ Number 9 » September 2011
Banking & Financial Services Policy Report ∙ 41