The illusion of safety

The failures of the regulated state

Just prior to Christmas, the government of Aotearoa New Zealand published various bills for public comment. The motive for exposing these proposed statutes over the holidays is not clear. If the authorities were hoping that a clash with the holidays would dampen enthusiasm for submission then they are likely to have been disappointed. The most curious proposal aired was a bill whose purpose is to improve the quality of statutes by “specifying principles of responsible regulation that apply to new legislation and, over time, to all legislation”. Cynics might suggest that many statutes can only be improved by repeal, the Companies Act being the most obvious candidate. It was first enacted in 1993 replacing an act from 1955. Counting back to the last listed amended version, being in 2007, there have been 85 separate versions. There were probably as many between 1993 and 2007. Hardly a sign of quality.

Perhaps it could be said that the Companies Act is a model of excellence in comparison to the Regulatory Standards Bill. It is shockingly inept and embarrassingly amateurish. Apparently, it or something similar has been in existence for decades, having been inspired by the Atlas Network or something of its ilk.

Proposed § 6 of the Bill, under various sub-headings, sets out a long list of criteria by which “quality” is to be judged. One sub-heading is the Rule of Law. The text then says that any law must be consistent the following identified aspects of the rule of law. It then specifies a list of four aspects. My mind immediately turned to what would a complete set of aspects entail. As good a source as any for a comprehensive description is Lord Bingham’s The Rule of Law. Bingham lists eight principles, meaning four are missing. The most conspicuous omission is this principle “the law must afford adequate protection of fundamental human rights”. The listing of human rights may strike fear in the hearts of Randian devotees which might account for the omission. Aotearoa is a signatory to the Universal Declaration of Human Rights (UDHR). Indeed, it played a prominent role in its formulation. Neo-liberalists would find Articles 22 and 23 anathema. Those Articles seek to ensure people have social security, protection when unemployed, have safe working environments and, above all, right to join a trade union. Another principle of the rule of law according to Bingham is that governments are required to comply with national and international laws of which the UDHR is a prime example. No surprises that it is missing.

In other cases, the aspects are inexplicably truncated. For example, the first specified aspect is that the “law should be clear and accessible” whereas the principle according to Bingham is: “the law must be accessible and so far as possible intelligible, clear and predictable”. At the risk of appearing naïve I assume that there is no tendentious motive for including some of the elements of Bingham’s characterisation but not others. But if not, then the Bill’s rendition illustrates ineptitude. It is meaningless to insist that a draft statute is accessible. It is an extrinsic quality not intrinsic. It is dependent upon the administrative arrangements of the state in general and is not therefore within the purview of each individual statute. To be fair intelligible and clear may be synonymous. The exclusion of predictability is not so easily explained. One dimension of predictability is that it prohibits retrospective legislation and that is listed in § 6. However, it is redundant as it is already a feature of the statutory canon (see the Legislation Act 2019).

Many commentators decry the more nakedly self-serving provisions which concern property. They think the draft bill would is intended to shield against eminent domain or impairment of assets through legislation. It may expose government to attack if it seeks to curtail harm from enterprises peddling tobacco, fossil fuels or any other of a myriad of detrimental commercial activities to which the world is subject.

However, my primary objection to the draft bill lies further along in § 6. Under the sub-heading Good Law Making there is an admonition to “carefully evaluate … the effectiveness of any relevant existing legislation and common law…”. The suggestion is an absurdity born of ignorance. The common law is vast. It could encompass contract law, tort (law of non-contractual obligation), various aspects of property law (real and personal) and so on. It is not even clear what constitutes common law. For example, common law is seen as separate from equity reflecting a divided history until the 19^th century. It would be strictly correct to ignore equity but maniacal given the array of remedies it contains.

Another intractable problem is how policy makers are to undertake careful evaluation. Both common law and equity have ample remedies for all circumstances and, even if they didn’t, they can be invented retrospectively. It might follow that there is no need for the legislature or its delegates to act at all if the scope of coverage are considered. But it would be remiss of the policy analyst to certify what the silly Act requires without taking account of the insurmountable obstacles in practical implementation. There can be no argument that the legal profession, so-called, stands in the way of effective remedy in which case the common law can be dismissed as ineffective from inception. Given the insoluble ambiguity one of two possibilities subsist. Either the civil service is being set up to fail or, as is more likely, the proposed law is a charade. It is an outbreak of the Anglo-Saxon disease – law as token, declaration to create the illusion of action.

I don’t disagree with Hayek and his distrust of bureaucracy and the endless stream of ever more complex legislation it thinks it needs. I do not consider myself a libertarian, the opposite maybe. But then the continuum from one side of politics to the other is less of a straight line and more of a circle. The extreme libertarian and the anarchist assume common postulates. There is no doubt that people, whether employees, customers or simply members of the public, need protection from dishonest, exploitative and careless commercial and financial operations. History is replete with exploding mines, oil spills, dangerous products, mass poisonings, pyramid schemes and stock scams. Since the advent of limited liability a couple of centuries ago, the vast majority of disasters were committed by corner-cutting corporations for the simple reason that it is profitable.

We don’t know if the cost to Norfolk and Southern Railway Company (NSR) of its near $2 billion in costs and settlements for its East Palestine catastrophe was worth the penny-pinching from which it resulted. Certainly, its profit was down in 2023 to $2.3 billion (including $1 billion cost for the disaster) from the record profits of the previous year of $4.1 billion. However, it is recovering though it is still meeting cost for the accident in the current year. The derailment at East Palestine had an actual and a proximate cause. The actual cause was brake failure. The proximate cause was train length. NSR, with others, had lobbied to relax regulation for the first. It had increased train length to minimise the need for labour. If the rail operation needs 2 people on a train, then double the length of the train.

The fiasco of NSR and Eastern Ohio illustrates the problems with regulation, where regulation means a body of rules set by a governmental authority. It is not as though there were no regulations. A brief scan of the Federal Railroad Administration’s website shows a plethora of legislative and regulatory rules. Eventually if you delve deeply enough you will find Title 49 Subtitle B Chapter II of which there are more than 50 individual Parts. Most of it seems to apply to passenger services rather than freight. Nonetheless a single rule about brakes applying to freight totals 35,000 words. What I cannot tell is whether the rule has been up-dated in the aftermath of the derailment or not. What had happened prior to the derailment is that NSR lobbied to dilute the rules. NSR spends millions on lobbying. It has increased its spend since the accident. A few million is loose change to a corporation making profits in the billions. Size matters in government. Most problematic is that because we live in highly regulated societies people believe regulation exists whether it is there or not and if it is that it is effectively enforced. The nanny state is a charade.

A good example can be seen in mine disaster which happened in Aotearoa in 2010. An accumulation of methane in the mine, owned by Pike River Coal Limited (PRC), exploded and killed 29 miners. PRC was subject to occupational safety and health (OSH) legislation which, self-evidently, it did not comply with. The regulatory framework had been borrowed from Britain. In the 1970s a mine exploded resulting in a report from a group designated the Robens Committee (Robens). Robens criticised a tangled web of regulation in various forms which it concluded was responsible for confusion. Instead, it recommended a ‘principles based’ approach. In other words, a generalised statement of what was desirable for OSH. As is typical of Aotearoa there was a legislation and therefore obligation but next to no enforcement. Law as façade is the worst of all possible worlds as Pike River demonstrates. If a government takes it upon itself to regulate then it should make adequate provision for enforcement. If it doesn’t want to meet the cost of enforcement, don’t create the obligation in the first place as it engenders the illusion of security where none exists.

Amongst the more pernicious regulatory regimes is that which applies to accounting or financial reporting as it is now called. The two terms might appear synonymous but appearances can be deceiving. Accounting standard setting had its genesis in the great depression. Academic accountants especially saw the root cause of the 1929 crash to lie in the absence of obligatory accounting rules. The formulation of standards was slow to begin with but with the advent of bodies dedicated to the task the trickle became a flood. The major force in standard setting is the US Financial Accounting Standards Board (FASB) whose partner and rival is the International Accounting Standards Board (IASB). Neither of the two bodies issue mandatory standards directly. In the case of the US the SEC imposes the FASB standards as obligatory. Many countries are now satellites of IASB and those countries government mandate their standards.

The collections of standards and interpretations are now vast and are subject to constant revision. There should be an adage to the effect that if you give a regulator a job to regulate, do not be surprised if they do. I defy anybody to find the set of binding pronouncements on the FASB website let alone make sense of them and implement. It would be easier to work out what brakes to have on a locomotive. And with all this vast proliferation of rules and requirements has it protected the markets from accounting failure? The answer is no and nothing will change in the future. One need only look at the recent collapse of Silicon Valley Bank to see the truth of my claim. The only real effect that this vast array of complexity has is to make it more and more difficult for new entrants into the capital markets and into the business of accounting itself. The intended effect does not happen whereas the unintended does.

As for Pike River what happened? Nothing much. The explosion rendered the company insolvent if it wasn’t prior. No prosecutions of negligent company managers or directors were initiated. No public servant or politician was fired or resigned. The company was operated by receivers after the explosion until the mine could be shut. Thereafter the receivers dismembered it. There was no attempt to hold directors, de facto or otherwise, accountable for the array of duty breaches theoretically available in the Companies Act. Nor was a dominant shareholder asked to contribute.

It is not even easy to see who got paid what in terms of distribution of funds raised from sale of assets and insurance proceeds. The last time Pike River reported it had $42 million in bonds outstanding which were supported by a first ranking security. Yet by the time the receivership was over 6 years later $80 million had been paid to security holders and a $22 million remained unpaid. It does not make sense. So much for regulation of accounting.

Those who advocate deregulation never seem to advocate for the abolition of the most pernicious form of regulation – the legislation that gives rise to the limited liability corporation. A misconception about the origins of limited liability is that it was introduced to protect the general public from the risk of investing. The true reason is that the wealthy believed they would have to pay disproportionately beyond their share of any loss if the less well-healed ran out of money. For an effective substitute to replace the ineffective but vast tangled web of regulation to be implemented a precursor necessity is the repeal of such limited liability. I will explain how in my next essay.

---

As I write this essay, I have been served with notice from an incompetent, corrupt and vindicative regulator (or irregulator maybe) that it intends to sue me to recover its grotesque cost claim of $260,000. I have written about this gross injustice before. I have already begun to contest the filing. I intend to make the story public for I agree with Justice Brandeis when he said:

If the broad light of day could be let in upon men’s actions, it would purify them as the sun disinfects.