Far removed from democratic decision making, issues around acceptability of private rule-making and enforcement can arise, writes COLIN SCOTT
IN THE early days of the global financial crisis it appeared that the reputation of processes of private and self-regulation had been irreparably damaged. President Nicolas Sarkozy remarked that self-regulation was finished. Principles-based regulation under which state regulators assign to firms and associations the task of developing and implementing the content of regulatory rules appeared to have lost all credibility.
However, in practice, private regulation is too significant to the functioning not only of financial markets, but a wide variety of sectors and policy domains, including food safety, environmental protection, data privacy and labour and human rights, for any significant retreat from non-state regulation to be evident.
In the financial area the private International Accounting Standards Board continues to be a key standard setter and it is accepted as inevitable that credit rating agencies retain a key surveillance role over public and private finance.
Though not as widely noted as the explosion of public regulatory agencies, the growing significance of private regulation, particularly at international level, raises acute problems relating to acceptability of private rule-making and enforcement, far removed from democratic decision making. There is also a risk that the effects of private regulation may be to benefit those promulgating the rules, rather than the public interest.
New research on transnational private regulation, funded by the Hague Institute for Internationalisation of Law and conducted by a team of researchers at University College Dublin, the European University Institute and Tilburg University, addresses these challenges.
It found the promulgation of private rules with significant effects for third parties clearly raises constitutional issues about the diffusion of legislative power beyond the legislature. In some instance the making and application of rules is self-regulatory in character, in other instances commercial associations and non-governmental organisations are developing rules to apply to others, frequently through the incorporation of codes within bilateral supply contracts.
Many private rule-makers have responded to concerns about lack of transparency and accountability for such rule-making by “constitutionalising” their process so as to include a wider range of stakeholders and to ensure appropriate engagement with those affected by the rules.
For example the Forest Stewardship Council, an influential non-governmental, environmental organisation which sets rules for sustainable forestry, has developed elaborate governance structures based on principles of participation, democracy and equality.
The private food standards organisation, GlobalGap, while it remains dominated by representatives of major food retailers and producers, has progressively widened rights of participation among affected interests (“notice and comment”) within the process for developing food production standards.
The processes for legitimating and holding private networks to account go beyond the mirroring of public law standards, however, and include pressures emerging from the need to compete both for firms to take up standards and for purchasers who are accepting of those standards. In the case of technical and financial standards the relevant professional communities frequently hold each other to account.
Moving beyond constitutional concerns, transnational private regulation also throws up risks that anti-competitive rules will protect the market position of those putting them forward.
A key problem is to develop ways for competition law to provide exemptions to private rule-making which might otherwise be condemned as a restrictive agreement, where it advances the public interest.
Part of the solution to this problem is to take advantage of the wider trend for both national and EU governmental authorities to engage with and provide some oversight for processes of private rule-making through processes of co-regulation, as occurs in many areas of technical standards which form a core part of many EU legislative regimes set down in framework directives.
While the remarkable growth of transnational private regulation throws up problems from the perspective of public law and competition policy, it also offers solutions to issues that cannot be resolved by classical law making and enforcement. Where military functions are contracted out to private security firms the risks of mistreatment and torture that have emerged, and notably the notorious practice of extraordinary rendition, may also be targeted by private rules such as those governing the operation of the aviation industry, so as to better provide for the protection of human rights.
If we accept that transnational private regulation is an inevitable feature of the contemporary landscape of governance, then the question is how to think about and address profound challenges relating to both the legitimacy and effects of the regimes.
This is a matter of learning how to harness the capacity of private governance to better serve public interests, while enhancing the visibility and quality of processes of decision making and oversight.
Prof Colin Scott is director of the UCD Centre for Regulation and Governance and associate dean of the UCD School of Law. The Challenge of Transnational Regulation: Conceptual and Constitutional Debates, edited by Colin Scott, Fabrizio Cafaggi and Linda Senden, is published by Wiley-Blackwell and as volume 38(1) of the Journal of Law and Society