Principles-Based Regulation

(Before It's News)

When we think of regulation, we think of specific rules that spell out the boundaries between what is approved and what is forbidden. For example, requiring credit card issuers to give 45 days’ notice prior to a rate increase. I call this bright-line regulation (BLR).

What I want to propose is an alternative approach, called principles-based regulation (PBR). With PBR, legislation would lay out broad but well-defined principles that businesses are expected to follow. Administrative agencies would audit businesses to identify strengths and weaknesses in their systems for applying those principles, and they would punish weaknesses by imposing fines. Finally, the Department of Justice would prosecute corporate leaders who flagrantly violate principles or who are negligent in ensuring compliance with those principles.

The fundamental flaw in BLRs is that they pit regulators against market actors, to the benefit of the latter. Bankers, for example, have regularly proven their adeptness at outmaneuvering regulations, keeping to the letter of the law while mocking its spirit. PBRs would do much to address this issue.

Full Arnold Kling post worth reading.

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