The UK's national governance is being corroded by a failure to identify and take the steps necessary to re-emerge as a sovereign country after leaving the EU. This is causing lower economic growth and an ungoverned clash of cultures which threatens the credibility of our system itself. The problem is that we are seeking to maintain large elements of the EU's approach to legal and regulatory affairs, and combining these with our own traditional methods in a novel way that is highly unsatisfactory.
Our democratic processes failed to grasp the implications of the Referendum decision. Many claimed they did not understand what it meant. No public documents, before or after the Referendum, have evaluated accurately the legal and regulatory reforms necessitated by Brexit. A lack of rigorous thinking has led to arrangements which are undemocratic in Northern Ireland and clog up the rest of the UK's democracy. It has also led to a continuance of the use of EU law and methods in a manner incompatible with our country's sovereign system, combining the detractions of over-controlling prescription and vaguely defined provisions which undermine legal certainty, with a lack of due process in many day-to-day cases. It has also led to an apologetic approach to foreign laws which purport to apply to the UK. We have a governance problem.
The problem can be fixed, so long as the UK finally grasps the importance of getting legal matters right. Mrs Thatcher in her great Bruges speech addressed the creeping project which threatened to subsume UK governance into that of the EU. However, she favoured the creation of the Single Market, failing to appreciate, like most others, the use and implications of the EU legal method, not at all similar to the UK's, that this involves. The relentless roll-out of EU law across vast swathes of activity, from financial services, to data, to consumer products and so on, went way beyond a common trading area and involved the creation of an EU system, using a very different legal approach first developed in nineteenth century France and Germany, to which most of Europe succumbed, but not the UK. Our problem arises from a failure to appreciate the implications of such matters, which has led to a failure to address them after Brexit.
The logic of Brexit was simple. The country was to leave the EU Treaties by triggering the two-year notice period in Article 50 of the Treaty on European Union. But, unfortunately, the process of leaving was botched from the very outset. Our negotiators agreed to the unilateral continuance of EU sovereignty under the Withdrawal Agreement, with the application of EU law as interpreted by the Court of Justice of European Union, the CJEU. Elements of that Agreement will continue to apply for up to 100 years, when the last ex-EU citizen has died. For Northern Ireland, under the Northern Ireland Protocol, now renamed the Windsor Framework, we agreed to the permanent application of EU law for industrial and agricultural matters, and to the jurisdiction of EU administrative bodies and the CJEU. This deprived the people of Northern Ireland of the right recognised in international law to exercise democratic consent in advance of any laws being made for them, in defiance of the constitutional settlement in the Good Friday Agreement whereby Northern Ireland is part of the UK unless the people vote otherwise.
The outcome for Northern Ireland was unintended. Representatives of the Unionist Community were reassured by the government of the day, including the UK's negotiators, that the arrangements for Northern Ireland were only temporary, and that they would be replaced in 2020, during the negotiation of the future trading relationship with the EU, the Trade and Cooperation Agreement, as foreshadowed in a joint Political Declaration which set out the shape of that Agreement. However, our then negotiators found they could not deliver on that promise, and instead made further concessions in the Trade and Cooperation Agreement over what is essentially the sovereign control of the fish in UK waters.
The Northern Ireland arrangements govern the whole of the UK in two ways, one practical, one legal. In practical terms, they restrain the UK in its ability to legislate sovereign standards for industrial and agricultural matters, if the country is to avoid pushing Northern Ireland out of the UK in further defiance of the Good Friday Agreement, by creating processes which show up the East-West border that now arises across the Irish Sea. In law, the Windsor Framework applies the misleadingly named EU "state aid" law to the whole of the UK. This law can be construed as giving the European Commission executive authority over a wide range of policies for the whole country, determined by the CJEU from time to time, including UK tax breaks or even deregulatory measures, where the Commission decides those might in theory damage the single market for trade across the north-south land border on the Island of Ireland. For instance, the Commission could potentially intervene on subsidies made to UK companies to produce electric car batteries on the basis that cars containing them could in theory be driven across the north-south land border.
These concessions must have been misunderstood by those who made them. They are certainly not pragmatic, as some claim. They amount to what can be called capitulations, unknown for over a century. They go further in fact than the capitulations of over 100 years ago, whereby China, Japan, Korea and the Ottomans agreed to the jurisdiction of the English courts over disputes involving British subjects, presumably because of a mistrust of the local legal system. The Chinese resent these concessions even to this day. But the arrangements recently agreed by the UK's negotiators are far worse. Even parts of the world formerly under British control tended to have local systems for lawmaking.
One might accept the bargain of pooled sovereignty over lawmaking in return for membership of the EU project. But what is at odds with international law norms is the idea of accepting the ongoing application of foreign law in return for trade. The UK now needs to take back its sovereignty, which is likely to require unilateral steps, using measures that respect sovereign borders. If the EU is willing to negotiate properly, and the UK appoints skilled and expert negotiators, we may be able to agree something which works well for the EU too.
There is another governance problem, however, which needs subtle treatment if the country is to prosper. At Brexit the UK took almost all the EU acquis, over 170,000 pages of it, onto its statute books. As a result, we currently have a hybrid legal system, with EU-inherited laws, conceived and drafted using an entirely different approach, sitting alongside the UK's pre-1972 legislation; UK legislation made outside the EU acquis but after 1972; and post-Brexit UK legislation.
There are several matters that need to be fixed all at once. The first to address is the removal of the EU's very different approach to law, which sees statute as the principal solution to most problems. The difference is increasingly evident given the pace of technological and social change. The permanent staff of EU lawyers in Brussels has legislated for crypto assets and AI in a way that is already out of date, and is busily constructing legislation for environmental and social matters, at a volume and in a style alien to the UK's system, which is causing huge damage to EU competitiveness. At root, the UK places far greater reliance on the common law and the courts for the provision of day-to-day remedies, in a way that massively reduces the need to legislate. Parliament's legislative role is far more focused. It is ill-equipped to manage the EU's pervasive approach.
However, primary legislation in the UK has become lengthier. Between 1930-1950, UK Government Acts averaged 16 pages. Between 2010 and 2016, they had grown to an average of 86 pages, and the number remains high. This lengthening is in part because of a greater complexity in our affairs, as is mirrored in a lengthening of statutes in the United States; but the overall volume in the UK arises from a shift in mindset.
There has also been a rapid increase in the amount of secondary legislation, from an average of around 2,100 Statutory Instruments a year, between the 1950s and the late 1980s, to an average of 3,200 in the 1990s, 4,200 in the 2000s, with a slight decline in the 2010s. The result of this ongoing deluge is that reasoned, analytical debate in Parliament and its Standing Committees is almost impossible, even on vital matters of policy. The UK must kick the habit and stop thinking that every problem, actual or theoretical, requires a legislative solution.
Secondly, the UK must remove or replace inherited EU law, to be free from the EU's legal method which is at odds with society's support for safe but free competition. This method is reflected in the 170,000 pages of inherited EU law and is being continued, unfortunately, in the making of many new laws and regulations. The EU's legal approach suffers from various methodological flaws:
some provisions are highly prescriptive, often tinged with the precautionary principle, which hampers innovation and entrepreneurialism. The desire for prescription is perhaps traceable to eighteenth century French thinking that at one time even involved the making of requirements for the size and shape of a handkerchief. In financial services, where most UK law is EU-derived, 1.7 million provisions of the inherited Markets in Financial Instruments Directive No 2, MiFID2, still govern the legitimacy of business models and day-to-day requirements for certain aspects of investment banking. The implementation costs alone for the industry were over $2bn; the ongoing compliance costs and unnecessary restrictions are significant too.
other provisions are too vague and at odds with the UK's desire for legal certainty, and the freedom this entails. These vague provisions cover wide areas of activity for which the legislators have no current plan. The premise is generally that the market and behaviours in it should be restrained. The vagueness of the rules ensures that the state has an ongoing role in determining the application of the law as new circumstances emerge. In the EU, this works in part through the application by the CJEU of its version of the purposive method of interpretation, which seeks to find an EU political purpose behind every provision. The lack of evidence for such purposes gives massive latitude to officials, requiring the private sector to ask those officials, in advance of acting, for the meaning of law and regulation. It also means that the CJEU can make its own political choice on the meaning of the law for cases brought before it.
EU law also has a tendency to seek to delegate the making of political choices to the private sector as to how the law should apply, in a way that creates legal uncertainty. So, the draft EU Corporate Sustainability Due Diligence Directive (the CSDDD), if passed, would insert a duty on directors of EU companies to consider environmental and human rights matters in decision-making; and companies would also audit their main suppliers and customers for compliance with similar standards. Those vital matters cannot be reduced to numbers, so directors cannot evaluate them objectively against foregone profits. By shirking the choice at a democratic level, the approach allows private sector directors to make those choices instead, with the result that they may indulge their personal political beliefs.
In addition, EU lawmaking operates on a more mistrustful philosophy. It places far less reliance on market forces and it is more willing to interfere with market pricing, as seen in requirements which heavily restrain the profitability of providers of certain data services in MiFID2, or on banks acting as members of clearing houses, where the UK would tend to trust competitive forces to achieve the best outcomes.
Such a top-down, controlling, system is alien to the UK's more liberal, democratic, facts and argument-based way of thinking. In legislation, the UK uses far fewer, more clearly drafted provisions. Great reliance is placed on high quality, independent judges to manage much of the law, evolving it through case law precedent as new situations arise. This approach provides for far greater levels of autonomy and self-confidence; and greater entrepreneurialism and dynamism, as US economic evidence now shows.
The Retained EU Law (Revocation and Reform) Act 2023 removed the application of the EU's general and interpretative legal principles. This includes the EU's version of the purposive method of interpretation. However, by leaving the 170,000 pages of inherited EU law largely untouched, the hybrid result is that the UK has adopted vague rules to which it must now try to apply its own more literal methods of interpretation, to text that was never drafted on the UK method. As with many hybrids, this is worse than before. It purports to create legal certainty where there is none. It levels down to the EU's uncompetitive system, hampering our country's entrepreneurs, business people and day-to-day affairs. Even the EU now recognises it has a competitiveness problem. The UK does not need to throw itself under the same bus.
The government needs to use the powers given by the Act to remove unnecessary inherited EU law and to rewrite what remains on common law lines. As things stand, these powers are not being fully utilised, because government departments do not have the expertise to appreciate the critical importance of such matters, nor the skill to engineer shifts on the scale required. I estimate the project, properly done, could be completed within a year.
Unfortunately, there is a third problem to address, which is that we are in many ways legislating and regulating as though we were still part of the EU. The UK legislators and regulators have started to use and write our own vague rules. Initially this was because the legislative governance of the EU meant that the EU rulebooks could not be amended quickly enough. More recently, our regulators have used this technique to protect themselves from political criticism. This means that, if things go wrong and public anger bubbles up, they can point to their prior generic instructions in a manner that implies prescience. But the problem is that this is at the expense of market efficiency and economic growth. Three examples should suffice:
UK financial regulators make widespread use of vaguely defined rules known as "Principles", requiring firms to do self-evidently good things such as acting with integrity, treating customers fairly, using proper standards of market conduct and most recently, delivering good outcomes for consumers, which includes fair pricing. These are used to deal with wrongdoing not covered by the vast blanket of inherited EU regulation. The habit started in 2007, using what were previously high level interpretational guides to address the wrongful manipulation of the bond market on EuroMTS by some traders using a strategy they named "Dr Evil". Another example is the use of Principles to address the manipulation by various banks of the LIBOR interest rate benchmark in 2012. These Principles have been applied inconsistently with little sophisticated reasoning.
In another shortcut for the inadequacies of EU consumer protections, the Financial Ombudsman Service was given, in 2000, the power to award compensation to consumers against financial firms merely based on what it sees as fair and reasonable, without any obligation to apply the law. But even some of those in the consumer lobby regard the legal uncertainty created by this non-legal approach as undesirable. Nobody knows in advance what the law is. It's a top-down system of benign munificence, operating somewhat randomly at others' expense.
The attachment to the EU's approach is also being used for new proposals from the UK's financial regulators for generic rules for diversity and inclusion, which use vague definitions of misconduct in the workplace and also at home in a crude effort to deal with this vital topic. This method is all fine until there is disagreement over the application of the rules.
The problem with this continuing approach can be seen from the debanking of Nigel Farage, earlier this year. His account was closed by Coutts Bank because some of the managers at Coutts did not like his views. The vague Principle of integrity and vague EU-inherited anti-money laundering laws were cited in justification, brushing aside a specific EU-inherited duty not to discriminate on the grounds of political beliefs. What this shows is how vague rules can be weaponised unpredictably in both directions – by firms as much as regulators. Since the regulators have the final say over how the rules are interpreted, the interpretations can become highly political, blowing with the winds, which is what happened to the Coutts managers when Parliament and the regulators turned on them. Rectifying the entire situation will mean adjusting day-to-day legal and regulatory methods.
On top of this, the UK has a separate "due process" problem. Amateur processes are often used to address allegations of social misconduct, applying vague rules whose meaning is determined by non-lawyers, who place occasional and discretionary reliance on lawyers. UK regulators, quangos and other parts of the administrative state can barely be challenged in courts or tribunals. The UK can only fix this if it applies proper legal techniques and encourages people to resolve their disagreements in proper legal fora.
Finally, the UK must stop apologising and stand up for itself abroad, resisting foreign legal encroachments at odds with the country's democratic values. In fact, bad lawmaking abroad drives business to these shores. A good example is the way in which, in the 1960s, the Eurodollar markets boomed after the US introduced controls intended to restrict European borrowing in the US capital market. The UK now faces a particular problem from the EU, with laws such as the proposed CSDDD, seeking to restrain the competitiveness of non-EU companies when they have EU-generated revenue above certain thresholds, even where that revenue only arises through the ownership of an EU subsidiary. In general, only UK law should govern UK companies. The country needs to take a rigorous and public position on attempts to apply foreign laws here, extraterritorially, and ensure that the ability for this to occur is heavily circumscribed. The UK system must help to protect UK companies and individuals when they are sued for non-compliance in foreign courts.
Overall, the UK needs to have faith in itself again. Those who govern must find ways to deliver on the interests of the electorate, expressed through democratic processes. For this they must properly value the UK's legal operating system, through which our citizens express our way of life. It is for those things that they are elected.
