Good regulation is about judgment

Regulators and regulated persons often view the same events through very different lenses. Having worked on both sides of that divide, I have come to appreciate a simple truth:

Good regulation is rarely about the rigid application of rules. More often, it is about sound judgment.

Reflections on due process, proportionality and regulatory decision-making

One of the features I have always found interesting about William Mason’s recent statements in the GFSC’s Annual Reports is that they rarely begin with regulation. Instead, they begin with philosophy.

In the GFSC’s 2024 Annual Report, he reflected upon the Old Testament and observed that many of the challenges confronting modern regulators are as old as civilisation itself. In this year’s report, he turns to Thomas Hobbes and the social contract, reflecting upon the role of the state in maintaining order before considering the challenges facing financial regulation in an increasingly uncertain world.

It is difficult to disagree with that premise. Human imperfection is a constant feature of society. Regulators exist because individuals and institutions sometimes make poor decisions, exercise poor judgement or fail to meet the standards expected of them. Equally, the retrospective assessment of intention and culpability is one of the most difficult exercises undertaken by regulators and the courts. Hindsight has a habit of making historic decisions appear clearer than they were at the time.

Against that philosophical backdrop, I was struck by the transition within this year’s report. The discussion moves from the complexity of human conduct to MONEYVAL’s observations concerning lengthy enforcement proceedings. The Director General suggests that delay is largely attributable to respondents pursuing appeals, procedural challenges and human rights arguments when they are unable effectively to challenge the underlying evidence. There is undoubtedly force in that observation. Those facing career-ending sanctions, significant financial penalties and lasting reputational damage should be expected to exercise every legal right available to them. That is not a weakness in the regulatory system; it is one of the safeguards upon which the rule of law depends. 

Viewed from the other side of the regulatory process, however, there is another perspective. Regulators are often among the best-resourced litigants within the jurisdictions they supervise, possessing dedicated enforcement teams, experienced legal advisers and, where necessary, the ability to pursue proceedings over many years. It is therefore unsurprising that some within the regulated community perceive lengthy proceedings rather differently.

The more interesting question is not who should bear responsibility for delay, but whether regulators can demonstrate that, throughout the life of an enforcement case, they have exercised all of the powers available to them to minimise unnecessary delay. That means applying proportionality, continually revisiting the evidence, and genuinely considering settlement where appropriate. If those disciplines can be seen in practice, confidence in the regulatory process is likely to be strengthened.

Applying the overriding objective

The true measure of a regulator is not its willingness to commence enforcement proceedings. It is the quality of the judgment exercised after those proceedings have begun.

One of the strengths of the GFSC’s enforcement framework and a feature increasingly reflected across modern regulatory regimes is its adoption of an overriding objective requiring matters to be dealt with justly, fairly, proportionately and expeditiously, whilst requiring the decision-maker to remain satisfied throughout the process that proceedings continue to be fair, proportionate, transparent and timely.

Those obligations are plainly intended to be continuing. Investigations evolve, evidence develops and context becomes clearer. The evidential picture at the conclusion of an investigation is often materially different from that which existed when concerns first arose. The decision to commence enforcement should therefore never become the defining decision in a case. The overriding objective requires the decision-maker continually to reassess whether proceedings remain fair, proportionate and justified.

That necessarily involves what litigators would recognise as a “stand back” exercise. Judges and appellate courts routinely remind themselves to assess the evidence in the round rather than focus upon individual pieces of evidence in isolation. The same discipline should apply throughout regulatory investigations.

Decision-makers should therefore periodically ask some straightforward but important questions. Does the evidence, viewed as a whole, still justify the continuation of proceedings? Have subsequent explanations materially altered the evidential picture? Has the passage of time affected the public interest? Does continuing litigation remain proportionate to the costs, both public and private, being incurred?

If those questions are genuinely asked throughout the life of a case, it is difficult to see how many enforcement proceedings should continue for the best part of a decade. Periodic reassessment is not regulatory hesitation. It is the practical application of the overriding objective itself.

Settlement and regulatory confidence

Modern regulatory frameworks increasingly recognise that early settlement is generally desirable. The GFSC’s guidance is no exception. Properly used, settlement should reduce costs, shorten proceedings and enable regulatory objectives to be achieved more efficiently.

The challenge is not the framework itself, but confidence in its operation. There remains a perception within parts of the industry that meaningful settlement discussions are relatively uncommon once enforcement proceedings have commenced. Whether that perception is justified is almost beside the point. If regulated persons and their advisers do not believe that constructive engagement is capable of influencing the outcome, they are unlikely to pursue it.

That is in nobody’s interests. Effective settlement conserves regulatory resources, reduces legal costs, shortens periods of uncertainty and enables regulators to concentrate enforcement resources on those cases that genuinely require contested proceedings.

Ultimately, confidence in any settlement framework will depend less upon what the guidance says than upon what regulators do. If it can be seen that settlement is genuinely considered alongside the other powers available to a regulator, it will reinforce confidence that every available tool is being actively exercised to achieve fair, proportionate and timely outcomes.

Reflections from both sides of the regulatory process

Having worked within regulation before returning to private practice, and now practising alongside Robin Gist, whose career has included many years acting for the Crown and Guernsey’s regulators, we have had the opportunity to see regulatory decision-making from both sides of the table.

That experience has reinforced a simple truth: good regulation is ultimately about judgment.

For those facing investigations, enforcement proceedings or other regulatory challenges, the real advantage comes from understanding not only the legal framework, but also the decision-making that sits behind it. Having acted within, alongside and against regulators, we are well placed to provide that perspective.

In regulatory matters, understanding both sides of the story can make all the difference.