Extra-Constitutional Issues
Extra-constitutional issues in the realm of economics are those aspects of oversight of economic relations that are not fully under the remit of the rule of law but fall under a regulatory environments, whether by statute or not, where the actors and agents of a subsector manage their own regulatory environment and procedures. This is common in some professions as well as the "light touch" regulation in areas such as the media and financial institutions. Such self-reulatory regimes tend to tilt decisions even when they end up in court, in favour of the group that is self-regulated. For example in the cases of medical legal work where assessments are made of medical negligence assessments for compensation tend to be more modest. Those giving expert opinion wish to be paid to keep on giving their "expert opinion". The Press Complaints Commission has been found to be next to useless in the case of British media and the hacking scandal and the light touch financial regulatory regime overseeing banks turned out to be disastrously deficient.
The specific reference to these types of arrangement as extra-constitutional refer to the fact that the provisions to protect the economic and social constituencies do not come under the full force of the law but are said to attempt to balance a view on what, under the existing regulations are prudent and acceptable actions and on the other side establish regulations. On the regulatory side there is a default position that the main preccupation should be to ensure consumers of financial services are protected. But this limited vision of oversight of an important economic sector overlooks that failure of banks is not just a consumer issue but rather is an issue of significance to all economic and social constituents because of the overall impact of poor decision making affects the whole economy.
Why do extra-constitutional regimes exist?
The main agents for the creation of extra-constitutional regimes are political parties and politicians wishing to protect major donors and supporters. However, politicians and political parties do this at the expense of the general population. Such regimes fail to protect the general public from abuse under the law and their very nature allows politicians to waive responsbilities by claiming whatever outrage occurs it occured within the existing regulations. Extra-constitutional regimes are essentially corrupt and are a serious affront to individual liberty and human rights. The most obvious extra-constitutional regimes exist in relation to the Military-Industrial Complex, the Corporate-Financial Complex and Mainstream Media (see Extra-Constitutionalism).
Hector Sants |
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Progress?
Hector Sants, Chief Executive of the Financial Services Authority (FSA), HAS recently described a Twin Peaks approach for future of banking regulation in the UK. Speaking at a British Bankers' Association briefing in London on February 6th, he reviewed the progress of reform in the British financial supervision system. The FSA and The Bank of England are jointly responsible for implementing the government's plan for reform, but their timetable is based on the assumption that The Financial Services Bill goes through the lengthy British legislative procedure without a hitch. As the British Government set out in its White Paper of June 2011, by early 2013 proposing that the FSA will be replaced by two new organisations.
These organizations represent the 'Twin Peaks' a model used in the Netherlands and Australia. Financial supervision would be divided into a Prudential Regulation Authority (PRA) a subsidiary of the Bank of England and providing resolution mechanisms and a conduct regulation under the Financial Conduct Authority (FCA) which will focus on consumer protection. Regulatory data will be collected using a common data system. The two bodies would exercise an "independent but coordinated" decision-making. Mr. Sants concluded his address by stating:
"Namely, to give an overview of the key elements of the twin peaks model which the FSA is introducing from 2 April. Although I have described the principal operational characteristics, I would like to close by stressing that the really important point is that we must use this opportunity to accelerate the behavioural and cultural change needed in both regulators and firms. The new world of judgement-based regulation needs to be embraced by us all."
Rearguard movements
In spite of the evidence of the lastest fiascos in bank decision making there is a denial amongst bankers that their size and mix of activities should be controlled by stronger regulations. Indeed they are lobbying hard against major changes in legislation with arguments that diversification of activities reduce risks when the track record has demonstrated the reverse to be the case. There has been some criticism within "banking circles" that Hector Sants is becoming too sold on strong regulation. The overall introduction of the FCA and PRA has been slower that expected. It is therefore not a surprise that Hector Sants has submitted his resignation. The more this process of attrition continues the more the banking lobby will gain influence over the regulatory process so as to ensure that it remains extra-constitutional in character and for judges, juries and ethics to remain at a distance.
Whose preferences?
It is apparent that the role of banks in the macroeconomic management of the economy has not been questioned. It is apparent that the emphasis has fallen to creating a regulatory regime focused on banks. The extraordinary state of affairs is that no one has called attention to the fact that it is the basic macroeconomic paradigm that is at fault. The Bank of England and the FSA seem to have taken an easy way out by assuming the macroeconomic paradigm will prevail and banking will face a changed regulatory regime. If this is the case a significant opportunity has been lost to begin to avoid the types of crises already experienced, since, if it is not housing, petroleum or derivatives, bubbles will appear elsewhere having the same disastrous impacts on the constituency. With the creation of multi-dimensional derivatives currently operating in the commodity markets and specifically the petroleum markets we are seeing inflation without control in these segments and a flaccid macroeconomic policy. On the world wide web startups are creating "credit and virtual money" for use in many different ways. A growing device is to sell credit representing a "discount" on future virtual purchases. The real world is moving far faster in the financial sphere than legislators so significant dangers exist outside any "prudential" regulations."
On the question of the adequacy of of the twin peaks model here there is a process concerning the observation of a parody of due dillgence by the banks and other financial intermediaries. Due dilligence has four elements which together ensure that it does not end up as a sterile checklist. These are the weightings of regulations, common law, ethics and prudence. If we only emphaise regulations and prudence we end up with the banks gaining almost complete control of the downstream process. The ethical and common law dimension are essential so that events that are clearly socially prejudicial cannot be defended by enterprise managers hiding behind the fact they followed procedures. Any corporate decision needs to be accompanied by appropriate decision analysis to assess likely impacts. Just because an action that is highly prejudicial falls within the regulations cannot provide any basis for defence of those perpetrating the harm. This has been the "justification" for widespread fraud, misrepresentation and banks behaving in a manner that has seriously prejudiced the general population because politicians have been scared into taking decisions that have compromised the future disposable incomes of electorates. This fix, one should note is fronted by politicians serving their core supporters at the expense of the electorate; this is how extra-constitutional systems operate. Somewhere there needs to be a discretionary judgement made in constitutional and not in business terms. In other words involving a judge and jury in significant cases. Because this is not being contemplated in favour of "light touch legislation", twin peaks does not appear to possess sufficient instruments to protect the economic and social constituencies. As a result we are likely to see financial intermediaries exercising doubtful and unethical practices and there being no legal proceedings in site; clearly this is what banks would prefer.
When Mervyn King first spoke about the need for prudential macroeconomic procedures this seemed to point to a more constitutional economic solution and, in particular, ethical due dilligence procedures backed by law. In terms of society it is not the responsibility of civil servants working in the Bank of England, the proposed Financial Conduct Authority or the Prudential Regulation Authority to weigh up if the behaviour of institutions, who have a role in the operation of policy instruments, are harming society; this cannot be limited to a consumer affairs dimension. There is a pathway to be identified between prohibitions and obligations, as well as considering behaviour being held up to ethical standards established by the community conscience in a court of law. It is necessary to establish clarity of distinction between the motivation of specific prejudicial decisions and attempts at rationlization, as an after-the-event explanation, of why a socially and economically prejudicial decision was in fact justified.
Mervyn King has stated that,
"There is no support in this country, and no case, for excessively bureaucratic regulation. But change to the structure, regulation and indeed culture of our banking system is necessary.... ....We have a real opportunity now to put that right, and regain the trust that has been lost."
When Melvyn King made this statement he was addressing, in the main, bankers and financiers, so stating that there was no case for excessively bureaucratic regulation was almost an essential reassurance. However, Britain's marketing of its light touch approaches in the professions and certain business sectors such as the press, legal medical and financial intermediaries as a superior and flexible method of oversight needs to be overhauled. All of these systems act in favour of the interest group that run the "self regulation" and invariably those prejudiced are so because a lack of legal protection and they are seldom compensated enough. As it stands the outcome has been that financial intermediaries have been compensated handsomely for incompetence and the electorate has not been protected but has been prejudiced by political decisions. One of the verbal sleights of hand is to equate legal constitutional process designed to protect individual life and liberty with excessive regulation. Our imperative should always ensure that a constitution and legal framework remain in place or be introduced to protect society; legal process is essential. Whereas excessive bureaucratic regulations have no case, underlying legal constitutional provisions do have a case. If individuals are ethical and follow what would be considered to be acceptable to the community conscience any "system" will work. It is unethical, prehensile, predatory or incompetent individuals who act without regard to more general social consequences of their actions; this is not a systematic problem but rather relates to pernicious individual values. This is why the community conscience, judges and juries have a role to play. Stating the "system" is to blame is avoiding turning the gaze of judgement on those individuals who working on their own account or as part of a group brought the economy and prospects of the whole population to ruin.
The current financial fiasco and, one might add, the current enquiry concerning doubtful practices in the media, should be sufficient to call attention to the fact that the exercise of institutional freedoms should not impinge upon the freedom of anyone not party to their decisions. This is a fundamental constitutional principle that should be defended at law. The resolution to this constitutional issue is not simple but it should be the objective of this exercise; we need to aim higher.
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