‘Flexible’ foreign investment laws are no laws at all

The most basic idea behind the rule of law is that there are … well, laws. These laws should be clear, stable and made by elected representatives. But this basic foundation of our legal system is often ignored in the name of “smart” regulation. Usually this involves a regulatory framework consisting of broad “principles” or general “guidance” rather than clear and binding laws.

One keen proponent of “smart” regulation is the Foreign Investment Review Board. The FIRB chairman this week opposed the idea that the national interest test should be codified, and stated, “[w]e’re not rules based.

This is a shocking admission for those of us concerned with the rule of law but it’s nothing new for investment bankers and M&A lawyers that regularly deal with FIRB. The long-standing policy justification is that “laws … too often … stop valuable investments.”

Many other regulatory agencies agree with this approach, maintaining that legal flexibility allows them to effectively tackle “changing conditions”. No doubt this is true. And allowing things to be decided on a case-by-case basis almost sounds reasonable until one realises the troubling consequences of such an approach.

First, it doesn’t allow businesses to plan their investments with certainty – a key to the promotion of economic growth. Secondly, the lack of black letter law makes appeals impossible. And thirdly, regulatory flexibility translates directly to regulatory discretion. And a high degree of discretion in the hands of bureaucrats is undemocratic and thoroughly undesirable.

Being unconstrained by rigid rules sounds great but legal flexibility is contrary to the rule of law.

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