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A Prize Worth Striving For

A Prize Worth Striving For*

This week the Chancellor’s Mansion House speech on the future of the financial services sector confirmed the UK was now free to do things ‘differently and better’ and intended to use that freedom ‘fully’. Here, Barnabas Reynolds considers why and how UK law must be restored. ‘Our way of life owes much to the legal thinking that encouraged freedom and entrepreneurship’ he explains.

The Legacy of Project Fear – Lost opportunities, misleading assumptions[1]

This year a vast array of opportunities opened to the newly sovereign UK. So far they have been under-appreciated. Why has the legacy of ‘Project Fear’ continued to cast its long shadow? To answer, we need only cast our minds back to the misleading claims, reasoning and analysis of the notorious ‘Project Fear’ campaign which, though now vividly exploded by events, revealed how many had lost faith in themselves and the UK. Trepidation corroded their position, as well as their judgment, both before and after the Referendum, going right to the top. The consequences for the negotiations under Theresa May’s administration were catastrophic, bequeathing a sorry chronicle of dubious assumptions and missed opportunities.

One missed opportunity was the UK’s failure to exert leverage to balance the dialogue and shape the EU negotiations so that they were equal and mutually beneficial – something which could have been helped by an offer to manage the risk of Eurozone based firms trading in or with the UK, which is one of a number of the risks arising from the problematic financial arrangements of the Eurozone.

In addition, in the negotiations with the EU, the UK allowed itself to be boxed into a beleaguered mindset, its horizons limited by both UK Europhile official thinking, with its questionable economic assumptions and forecasts, and the EU’s opportunistic reasoning, with adverse consequences for both parties. Conspicuous were the ideas that:

  • the UK had to be worse off outside the EU. This was a politically inspired mantra, and not only in the EU, since it also affected assumptions on which some official UK forecasting was based;
  • the UK had little choice but to accept most of the EU’s basket or none at all – the EU scheme representing a bunch of fruit, some of which might be cherries, others rotten;
  • the UK would not be permitted to negotiate trade deals until outside the EU, preventing it from mitigating its position with a favourably disposed US (a point not stipulated in the EU legal texts);
  • there was a ‘cliff edge’ for financial contracts, requiring certain EU financial business to be transferred immediately to the EU, failing which the EU would pursue the business providers for criminal breaches of EU law, despite international and supranational law which protected the performance of such contracts;
  • the UK should negotiate as a country, whereas the EU could negotiate partly as a bloc and partly as separate states, for instance on citizens’ rights; and
  • the only solution to maintaining an invisible north-south border with the Republic of Ireland was the application of EU law in Northern Ireland, even though this created a very visible border across the far busier crossing, within the UK, of the Irish Sea.

The EU negotiators maintained an unneighbourly attitude which took advantage of the situation, with an approach that reflected the old French adage: Cet animal est très méchant, Si on l’attaque il se défend (This animal is vicious, When we attack, it defends). Inventive solutions to providing for an invisible border in its rightful place, based on a technique whereby each party would enforce the other’s laws over exports across the north-south border (‘mutual enforcement’), were left unexamined, and then brushed off by both parties as a conceptual irritant.

Two Regimes, Two Legal Systems

Yet the most serious mistake, which underpinned the absurdity of these failings, was a failure to examine, let alone understand, the fundamental differences between the UK and EU legal systems and methods of reasoning. This topic was not explored in the all-important discussions during the critical evaluation of whether to join the Common Market and in the negotiations for the UK to join in 1973.[2] Nor has it been generally considered or explored in shaping policy since then. Now, however, we see that the largest opportunity for the UK arises from its very different system of laws. It is the law which most reflects and drives our different societies and economies. This difference may also help explain what appears to be unthinking hostility from the EU.

Many would accept that the British people appear to be tough, entrepreneurial and innovative. Even the Covid vaccination successes appear to bear this out. Innovators, often undiscovered or unsung, have sometimes launched start-ups in garages or garden sheds, finding solutions to problems others think of as insoluble. However such invention is in part underpinned by a ‘common law’ legal regime and mode of thought which permits, nurtures and then recognises it. The point holds true for Scots law, which is similar to the common law in this respect.

This contrasts with the top-down systems of the Continent, including the EU itself, where a small, well-intentioned group of legislators, and governors, seek to set out legal answers in advance of every problem, and to shoehorn economic activity into their defined scheme. Their approach tends to stifle entrepreneurialism, being based more on collective action and political control through legal codes.

The differences are marked. The UK system belongs to no-one, and was developed by a multiplicity of judges over centuries, with limited Parliamentary and regulatory interventions. Power is dispersed, its very method providing vital checks and balances. Intrinsic to it is a system of judicial case law precedent, which focuses on instances in which legal remedies are to be made available to litigants, along with limited restrictions on behaviour and the presumption that everything else is permitted. By contrast, in the EU and across much of the world, legal codes, created on a model of lawmaking developed in the nineteenth century, seek to superimpose often vague and abstract notions of fairness on individual and commercial activity, policed by officials who introduce their own, controlling and generally risk-averse approach. The system seeks to define rights, obligations and the various restrictions in advance, pitting them against each other in permanent and unpredictable tension, thus denuding commercial actors of the confidence to innovate, since the method requires officials to step in and address uncertainties by applying the law according to evolving, centralised notions of policy. The overall approach tends not to favour the levels of risk-taking and uncertainty that form the milieu for entrepreneurs.

The doomed negotiations of Theresa May and her team, which accepted the imposition of EU law on the UK’s economy in the belief that this was good for UK commerce, were misguided, since they failed to accommodate the crucial legal distinction. Worst of all was the negotiators’ acceptance of the EU idea that the application of EU law in Northern Ireland would provide some form of workable solution to an invisible border on the island of Ireland. This apparently was thought to provide leverage for the application of elements of EU law, underpinning a future UK-EU trade agreement, across the whole of the UK. The May team had entirely failed to appreciate the consequences of accepting the EU’s politicised legal framework, with its foreign methods, without the limited political protections that arose when the UK operated within the EU itself.

The renegotiation of the whole arrangement under the Johnson-Frost team now requires them to grapple with an ideological EU thought process, embedded as things stand in the UK-EU Withdrawal Agreement and its Northern Ireland Protocol, in which theory trumps the facts, in a manner alien to the common law.

Understanding the differences between the legal systems matters for identifying the opportunities and best future for the UK, its economy and prospects and of how its legal system should now be reordered for success. For the common law has been shown to lead to greater economic growth.[3] At the root of the UK model is its respect, on its traditional basis, for freedom to innovate, unfettered by state control. At its apogee, in the hands of extremely able common law judges, the system supported and facilitated free trade for much of the nineteenth and early twentieth centuries. The industrial revolution benefited from the support of a system much of which had been developed and honed by Lord Chief Justice Mansfield, a Scot by origin, a century before. Small wonder that Google’s Larry Page and Sergey Brin attributed aspects of their success to the US’s equivalent common law methods,[4] in their case in relation to intellectual property law. In contrast, the code-based civil law methods of top-down control, in use on the Continent, within the EU legal scheme and in many other parts of the world, have coincided with a more restrictive approach to economic activity and often a more mercantilist approach to trade, under which state power is used at the expense of other countries, by ensuring that exports exceed imports.[5]

Recovering UK Law – Restoring UK Economic Innovation

The UK must now rapidly recover the legal methods that have over centuries proved so successful for economic life. After the Second World War, and in joining the EU, the UK appeared to lose its confidence. It followed a growing trend towards greater levels of regulation, the use of quangos and the widespread devolution of unchecked power – a position subsequently exacerbated by the application of a blanket of (what is now) EU law, spread across multiple sectors after the UK joined the European Communities in 1972. Legal methods were influenced to become more controlling. Undue reliance came to be placed on numerous unelected bodies, from health and safety, to data protection, to energy pricing. These bodies can act as arbiters of fact over whether vaguely drafted (EU) rules are breached, and in some cases make and interpret their own rules. Uncertainties over such delegated powers and in the rules that are created often mean that our officials, like those of the EU, tend to be in a position to impose their own judgements over what is permitted. Media calls for fixes to problems and answers to questions find ready responses from officials, who can exercise quasi-legislative authority without meaningful Parliamentary oversight.

Such practices are not in keeping with the UK’s transparent system of clear laws as it traditionally developed and was executed. It has led to a damaging disconnect between the electorate and the system itself, since there is no adequate check or balance that prevents largely well-meaning officials from exercising arbitrary power and stifling business innovation in an attempt to impose their own vision. In order to unleash our entrepreneurs and enjoy the fullest of economic benefits, we need to understand why the EU’s legal system is not only at odds with our own, but also that retaining aspects of it is misguided, quite apart from obvious objections on sovereignty grounds. Only by a radical programme of restoring the UK’s pragmatic, low-intervention approach to law and regulation will this country once again unleash the true power of the British people.

The compass is to be found in the legal traditions which often operate with judicial case law and allow for legal predictability and legal evolution at one and the same time. These still underpin our regime, despite its having been partially corrupted over decades during which the advantages were neither fully understood nor acknowledged as the EU legal blanket was accepted as one benefit of membership. It is vital the Government seizes the opportunity to reformulate the regime. This will require dramatic leaps to be taken. There are times, as Lloyd George the last Liberal Prime Minister said, ‘when you need the courage to take a great leap; you can’t cross a chasm in two small jumps.’ In this case there are two wide chasms to be leapt.

Two Chasms, Two Leaps

The first leap will be to remove the inherited blanket of EU law and to revert to the UK’s traditional common law approach of clear law, sparingly applied, only where necessary to redress wrongs and prevent or restrict dangerous activities. Furthermore, we need to address the methods of our regulators. For not only does the inherited EU approach present problems, but our regulators can do so too, even under a reordered regime, if their role is not properly defined. They cannot be above scrutiny. Parliament and the courts will need to oversee our regulators, to ensure that they do not make and apply rules in a way that creates uncertainty. For this, it is necessary to restore the UK’s constitutional arrangements governing the separation of powers, which provide an objective check and balance to ensure that citizens and businesses have equal standing with the regulators before the law.[6] Legal and regulatory certainty, and the lack of unnecessary rules or arbitrary power, is key to entrepreneurialism.

For the second leap, the UK needs to enhance the attractions of its export industries, based as they are in an economy of which the services sector constitute 80%. Particularly important are financial services, since the UK is the host to the one of the two global financial centres. In principle, these services can be provided from the UK virtually, cross-border, to customers all over the world. Here, the law, itself a market-leading global service, is again key to achieving optimal results, since the underpinnings of the UK’s services exports are the UK’s legal services. The most successful UK lawyers, operating on the basis of the UK’s legal regime, operate at home and across the world, helping businesses and consumers create their own contractual terms and ensuring that these are properly upheld by our courts. Their role, as facilitators not fixers, is fundamentally different from that of the lawyers operating on the code-based civil law model.[7] UK law permits private parties to agree their own legal regime in the contracts they make, subject only to minor policy-based restrictions, by contrast with EU code-based methods, which seek to impose a legal superstructure on the wishes of contracting parties. Only the law of New York state, also a common law system, rivals the role of English law in global commerce – evidence of the superiority of UK law. Now that the UK has left the EU, the UK system should be more fully deployed on the basis of its own trusted identity. The high quality judiciary and an adversarial court process already allow for the resolution of highly complex disputes, providing for legal certainty even in situations of phenomenal subtlety. This, and the legal services providers themselves, are a hugely attractive element in the UK’s regime. However, steps can be taken to enhance the position, both by assisting firms in promoting and delivering online services and products globally, based on the security of UK law and regulation, and by allowing the world’s consumers and businesses to avoid the complexities and pitfalls of entanglement with other legal systems.

Reinvigorating UK Law

Different elements of the re-invigorated system will need attention, coordination and explanation – with an overall account of the UK’s legal scheme and values. New arrangements must be developed on the basis of the common law’s flexibility to allow for the resolution of all cross-border issues within the UK’s trusted system, with as many UK services as possible provided within the UK’s secure legal framework. The versatility of the common law allows for numerous such solutions.

Further action will be needed to refresh other features of the system. In recent years the system has been undervalued, with the removal by Tony Blair of the post of Lord Chancellor as a senior practising lawyer, while the judicial system and legal aid arrangements necessary to oil our system’s wheels have suffered from budgetary cuts. The judiciary needs adequate finance, at a level sufficient to continue to attract extremely able lawyers to become judges. The legal aid regime will need adequate support if it is to attract strong lawyers, lending their skills to those in need of assistance but without the personal means to seek legal redress. Unfortunately both have withered.

Schemes such as the Financial Ombudsman Service have tended to circumvent the legal system, on the assumption that they provide a way to offer cheap and rapid ‘justice ‘ for small financial claims. But in so doing they take a short cut to applying the law, depriving the legal system of much-needed judicial decision-making as well as the enhanced legal certainty that would otherwise result. These schemes should be replaced with proper legal processes, re-structured so that they are low-priced and fast. Overall, it is the lawyers who will need to reshape and apply our system after the EU years, and to reformulate the rules, subject to parliamentary oversight. It is they who can properly identify how it can be optimised. Questions for solution include which inherited EU rules achieve valid aims but are poorly couched, and which can be removed entirely without affecting societal values or safety and soundness.

A Prize Worth Having

The prize is worth having, not only for the UK, but for global commerce and for the liberal values espoused by the UK’s legal system. Many states have begun to realise the benefits of the common law. New financial centres and economic zones are being established in the Middle East, Asia and elsewhere, each of which draws on the UK’s unique legal technology. Many seek to replicate it entirely. Yet, the full benefits of the system derive from those who operate it, with all of the depth of thought, values and purpose they bring. The pride we should have should not just be in helping other countries, but in recognising the skills of those we have who operate that inheritance. This will provide significant new opportunities for the UK’s legal, financial and other service providers alike. The foray into the EU’s legal scheme without sufficient thought has been a digression, but with two great leaps it is now possible to arrive back where the UK should have been, in a world far more modern, dynamic and interconnected than it was when we first entered the European Communities. For the current world, with its World Trade Organisation arrangements and services capable of being provided through the ether, is based on low tariffs and cross-border trade, both virtual and real, to an extent that is far easier than ever before. Maybe our predecessors’ mistake was not to see that coming, but this error was compounded by their more fundamental failure to understand our own unique system. Fortunately, the results are only temporary and we can now think our way through to renewed success.


* This analysis develops some of the points raised in my Restoring UK Law: Freeing the UK’s Global Financial Market, Politeia, February 2021.

[1]  This section draws on my recent co-authored analyses with David Blake and Robert Lyddon, Managing Euro Risk: Saving Investors from Systemic Risk, Politeia, February 2020 and, with Edgar Miller and David Trimble, Correcting the Damage Caused by the Northern Ireland Protocol: How Mutual Enforcement can Solve the Northern Ireland Border Problem, Centre for Brexit Policy, February 2021 as well as Shearman & Sterling’s Continuity of Contracts and Business on a ‘Hard ‘ Brexit: Human Rights and Reverse Solicitation to the Rescue!, October 2017.

[2]  E.g. David Spanier, Europe our Europe: The Inside Story of the Common Market Negotiations, Secker & Warburg, 1972; and Michael Charlton, The Price of Victory, BBC publications, 1983 (which contains interviews with many of those involved in the negotiations).

[3]  E.g. Cross, Identifying the Virtues of the Common Law (2007) 15 Supreme Court Economic Review 21; Graff, Law and Finance: Common Law and Civil Law Countries Compared: an Empirical Critique (2008) 75 Economica, New Series 60; Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, The Economic Consequences of Legal Origins (2008) 46 Journal of Economic Literature 285; and Mahoney, The Common Law and Economic Growth: Hayek Might Be Right (2001) 30 Journal of Legal Studies 503.

[4]  See A. Chander, How Law Made Silicon Valley (2014) 63 Emory L Journal 639, who relates that these two individuals noted that US law afforded key flexibility, particularly in the area of intellectual property law, to their business. Such flexibility apparently could not at the time be found elsewhere to the same degree as in the US. Chander also observes that ‘[j]ust as nineteenth-century American judges altered the common law in order to subsidise industrial development, American judges and legislators altered the law at the turn of the Millennium to promote the development of Internet enterprise. ‘

[5]  The Napoleonic French approach was mercantilist in nature. For Germany, a most interesting analysis of how the UK’s laissez-faire, common law-based approach to free trade was perceived to have damaged German (and purportedly, in the German view of the time, other Continental) interests is contained in the Europäische Wirtschaftsgemeinschaft, Berlin 1942, Funk, Jecht, Woermann, Reithinger, Benning, Clodius and Hunke. In this paper, Funk (pamphlet 1) attacked the Anglo-Saxon system based on (as he saw it) the philosophy of Hobbes, Hume and Ricardo, and argued for a more controlling, top-down approach to be adopted.

[6]  For discussion and recommendations, see my Restoring UK Law: Freeing the UK’s Global Financial Market, Politeia, February 2021.

[7]  For an explanation, see Barnabas Reynolds, British law can flourish once more now we have left the EU, The Telegraph, 12 June 2021.

 

Barnabas Reynolds

Barnabas Reynolds is a partner at Shearman & Sterling LLP and Global Head of the Financial Services Industry Group. He is the author of Restoring UK Law: Freeing the UK’s Global Financial Market, (2021) and co-author of The Lawyers Advise: UK-EU Trade and Cooperation Agreement – Unfinished Business? (2021).

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