The return of common law is the key to the success of the City, not the EU code
As it seeks to capitalize on Brexit, the UK should shed the legacy of the EU’s codified legal system and fully restore its own common law. This will bring many opportunities to the city and the millions of people benefiting from the financial services industry across the country.
Not only does the common law underpin the world’s most successful financial centers – London, New York, Singapore and Hong Kong – but the evidence shows the superiority of the common law for economic growth. Financial centers that set up in the Middle East and elsewhere adopt common law.
The common law values ââindividual and commercial liberty. It relies on independent judges and evolves with change, and it does not have a single, omniscient creator. This allows it to focus on appropriate remedies and responsibilities, and on limited restrictions when these are needed.
In contrast, EU law has largely developed on the continental model, based on the civil law approach and developed using the French-German coded systems of the 19th century. These aim to provide answers in advance to any problem. The code is likely to set out both rights and restrictions, putting them in tension with each other. The scheme is designed for control.
Why restore common law?
EU law has bound UK financial services firms under a cumbersome code. The law froze, requiring constant attempts to update and upgrade the code and its operating system. The method contradicts the UK approach.
Bringing the common law approach back to life means removing unnecessary provisions in EU law – of which there are many – and reformulating those that remain in the clear and predictable sense of the common law.
Reforming the Small Claims System
We should also address the current approach of allowing the financial ombudsman to deal with small claims. He is given the ability to ignore the law and simply strive for fairness, in an effort to settle disputes on the cheap. But this is detrimental to the development of the law and the financial market, because the clarity of properly reasoned court decisions is lost.
It is fair to have a cheaper form of small claims justice. However, the legal system needs to be fully deployed and we should use junior judges for these claims. There must also be judicial review for any remaining claims for the ombudsman, to ensure that legal principles are broadly observed.
In addition, UK regulators may need to change direction. Under the EU, they operated a system mixing continental law with ours, forced to interpret detailed EU rules and judge whether they were broken. A single example, MiFID2, contains 1.7 million provisions.
In addition, they often relied on their own rules called “principles”, introduced to avoid even more rules. This approach leads to a double uncertainty: that of the codified system of the EU and the additional layer of uncertainty of the regulator.
The brilliance of the common law is that, while offering flexibility, it brings predictability and certainty. The way to do this is to ensure that the regulators operate with careful checks and balances. Regulatory powers and objectives should be carefully defined. Judicial review can be facilitated, allowing courts to apply their rigorous approach and ensure that regulators are subject to legal oversight.
There is also a need for greater parliamentary oversight of regulators. The select Treasury committee could fulfill this function through a new sub-committee which can rely on a panel of experts. This body could review the exercise by regulators of their regulatory and supervisory powers.
In addition, processes should be considered whereby Parliament can veto proposed new regulatory rules.
By restoring UK law, reforming regulations and removing burdens from the EU’s codified system, the UK financial sector and its businesses across the country will be free to rediscover all the benefits of freedom and prosperity that She bring.
Barnabas Reynolds is a partner at Shearman & Sterling and author of Restoring UK Law: Freeing the UK’s Global Financial Market
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