Business seeks clarity but demands sensitivity to particular circumstances, looks for certainty but resents detailed prescription, and as they grumble business people fail to recognise the incompatibility of these demands.
If you work in a dusty environment, you should wear a respirator and ensure that your beard does not get in the way. But defining an appropriate rule is not easy. Perhaps people who use tight-fitting respirators should not have beards. But can they have stubble? At what point does stubble become a beard, or five o’clock shadow stubble?
If you are the US Occupational Health and Safety Administration you have to worry about these questions. Their rule book includes facial hair prohibitions with detail and cross- references. These complex provisions invite businesses to comply with the rules rather than ensure a safe and healthy working environment.
But what are the alternatives? Some people argue that any such regulation is an inappropriate interference with freedom of contract. Such a view is not tenable. The market has its mechanisms for securing health and safety – companies rely on their good reputation when they try to attract consumers and employers. But the consequences for the brand are not sufficient protection when corporate failures are gravely damaging to health or wealth. Firms that poison consumers, kill workers or defraud investors may go out of business, but this is inadequate consolation.
Regulation of such matters is inevitable. Yet even if the law does no more than penalise employers or producers for negligence, it is drawn back into the description of negligent behaviour. Faced with framing a legal definition of a beard, we would prefer to rely on common sense. But common sense is hard to define. Common sense is the knowledge that wise and experienced people have but find difficult to articulate. The problem of writing it down is what distinguishes common sense from book learning.
The British approach to health and safety regulation attempts to rely on common sense. The law imposes on employers a general obligation to ensure health and safety, and leaves it to them to work out what this means.
But this approach has its own problems. Common sense is not a universal quality among judges, regulators or employers. The patchy nature and uncertain content of common sense leads to the prohibition of harmless activities because people fear the consequences of failing to comply with a loosely worded rule. Even so, the world of common sense offers no safe harbours: no one can be quite sure what they are and are not permitted to do. Conservatism rules: it is too easy to equate common sense with traditional practice.
So the pressure for more explicit regulation comes from several different sources. When things go wrong, the public demands specific rules that will prevent these failures from happening again. When the laws attempt to impose general duties on business people, they in turn demand specific clarification of the meaning of these obligations. And more carefully targeted rules may seem less discouraging to innovation.
Business seeks clarity but demands sensitivity to particular circumstances, looks for certainty but resents detailed prescription, and as they grumble business people fail to recognise the incompatibility of these demands. So regulation evolves through cycles. Rules become over-prescriptive, promoting a retreat to more general principles. But then the trend reverses, as these principles again become elaborated with more detailed rules and guidance.
In financial services, as in health and safety, Europe has tended to favour the general and the discretionary, the US the specific and the legalistic. British accounting standards have relied on broad concepts such as true and fair rather than formal requirements of conformity. European securities markets depend more on the good faith of issuers and their agents and less on specific disclosures and warnings.
Who would want to be a regulator? They tread a fine line between detailed prescription and inchoate principle, they must constantly listen to people who say “the government should do something about that” and to people – often the same people – who deplore red tape. That is how we often get the unsatisfactory regulation and undistinguished regulators we deserve.