Scholars argue that the diffusion of soft law norms throughout the European Union promotes reliable accounting practices.
Is it possible to create wide-spread adherence to a clear and uniform set of accounting practices across a market as large as the European Union? One possible way is through the diffusion of soft law norms. Relying on soft law’s less binding norms, contrary to regulators’ typical reliance on hard law, could create a single regulatory regime for financial regulation.
In their journal article, Abraham Newman and David Bach suggest that soft law does not create as strong an obligation to comply with its dictates as hard law does, but nonetheless carries its own unique advantages. Political scientists use the term “soft law” to describe rules that guide behavior but have not yet achieved the formal status of “hard law.” International soft law has the distinctive advantage of making it easier for national governments to incorporate its norms into their policies by avoiding the extensive adjustments to domestic laws that international hard law would require.
Therefore, soft law, while having the substantive content that political actors will find easy to identify with and praise, also does not impose high adjustment and implementation costs for compliance, compared to hard law. Policy-makers will face less domestic backlash from local constituencies that may have opposed the changes to local institutions under hard law. The International Financial Reporting Standards (IFRS) originally developed by the International Accounting Standards Board (IASB), for example, were guidelines for best practices that could be implemented by firms in “Asia, Australia, Europe and the Americas.” When the European Commission issues a set of uniform accounting standards, national governments have an incentive to conform to them. Doing so will bring their policies in line with a clear and reliable set of standards that other governments committed to transparent decision-making also follow. Supranational standards, therefore, create mutual transparency and are equivalent to a definitive reference for both international and domestic monitoring boards that regulate states’ banking practices.
Newman and Bach discuss two main approaches through which soft law diffuses in the EU. The first approach is diffusion from the highest administrative levels down to the lowest ones through the generation of guidelines for best banking practices throughout the EU. Recent examples of this top-down approach, by which soft law norms are diffused through a “multi-level governance process,” are the Banking Directive and Capital Adequacy Directive of 2006, which incorporated the Basel II structure for financial regulation. This process is termed norm diffusion through “supranational imposition.” This approach enables those authorities at the top of the bureaucratic hierarchy to tackle the problem of inefficiencies arising from regulatory discrepancies through direct oversight by EU regulatory officials.
The second approach is for policy entrepreneurs and activists at the lower levels of the political order to lobby domestic policy-makers to conform their regulatory practices to EU standards. Policy proposals that support the incorporation of the soft law norms commonly endorsed by EU member states are put on the domestic agenda through the pre-existing channels for debate and then become “embedded” into national policies.
Newman and Bach suggest that the first approach is superior to the second for the following reasons. One advantage is that member states do not need to implement costly legislation. Because the EU directly oversees and monitors the supranational imposition of standards, a member state must only ensure that its accounting practices are set up in a way that the monitoring board considers equivalent to EU standards. This foregoes the conventional process of domestic ratification altogether, increasing regulatory efficiency. Another advantage is that EU endorsement of a particular soft law norm, in conjunction with support for its content in critical markets such as the United Kingdom and Germany, will generate momentum that accelerates the adoption of the norm across all member states and even non-member states.
Newman and Bach have described the usefulness of soft law norms in enabling a central government to take advantage of soft law’s clarity of substantive content and low costs of incorporation. It remains to be seen whether the success of the top-down, global approach can be repeated in other issues areas besides financial regulation.