In evaluating investments in any country, a key consideration is always whether that particular nation has a strong rule of law.
Companies and professional investors want to make sure commercial contracts are protected by precedent and by an independent judiciary from the circumstances-driven meddling of government. No matter which way public and political opinion blows, investors want to know a legally entered contract is sacrosanct.
So it is quite ironic that a historic beacon of the rule of law, the United Kingdom, is about to consider allowing government to violate what should be the inviolable.
In a legislative program to be released later this week there will be a plan to allow the regulatory body the Financial Services Authority to “terminate the remuneration contracts at British banks and to fine them when payments are considered too high or have rewarded undue risk-taking,” reports Alistair Macdonald in The Wall Street Journal.
Think about that. As an employee, you sign a contract with a bank. It runs a certain number of years and grants you a certain level of compensation, based on targets, financial performance and the like. Along comes the FSA and says the contract is no more, you are getting paid too much.
Admittedly, a pay contract is different than a commercial contract establishing a merger between companies or one setting the supply of goods or services.
But, still, it’s an awfully slippery slope.
In this perhaps fair to say post-financial-crisis era, governments have a larger role to play in the financial sector. Part of this is based on the enormous power of the sector, as just and still demonstrated, over the rest of most major developed economies. Another key point is that taxpayers’ money is the reason a number of large financial institutions still exist.
This blogger has opined that in those companies in which government is the major shareholder, or a major shareholder, it has the right to act like one, including imposing restrictions on pay.
But the touch needs to be lighter in the sector outside those receiving direct assistance. This inching forward of government control has been a hit-and-miss exercise in what’s appropriate in a free and open economy and what is not.
Granting the right of a regulator to tear up individual contracts is a bridge too far. There are other remedies such as setting pay guidelines. If those are violated, one can see the imposition of other strictures such as higher reserve requirements.
