Strategies of Financial Regulation: Divergent Approaches in Conduct of Business Regulation of Mis-Selling in The UK and South Korea Junghoon Kim

Strategies of Financial Regulation:
Divergent Approaches in Conduct of

Business Regulation of Mis-Selling in
the UK and South Korea Junghoon Kim
Visit to download the full and correct content document:
https://ebookmass.com/product/strategies-of-financial-regulation-divergent-approache
s-in-conduct-of-business-regulation-of-mis-selling-in-the-uk-and-south-korea-junghoo
n-kim/
Strategies of
Financial Regulation
Divergent Approaches in
Conduct of Business
Regulation of Mis-Selling
in the UK and South Korea
Junghoon Kim
Strategies of Financial Regulation
“‘Mis-selling’ of financial products is one of the keen issues in the matters of finan-
cial regulatory policy-making and financial consumer protection. This book, writ-
ten by an examiner of the Korean financial supervisor, is deeply and precisely
analyzing the causes of mis-selling and the problems in enforcement process, and
further suggesting some legal and regulatory reformative measures to solve these
problems. I strongly recommend financial regulators and policy-makers to read
this book because it will definitely help them set up a more efficient financial regu-
latory regime for financial consumer protection.”
—Dong Won Ko, Professor of Financial Law at Sungkyunkwan
University Law School, Korea
“This work represents a unique and original perspective on one recently mani-
fested consequence of innovation in global financial markets, namely, the fact that
in the face of extreme complexity, information asymmetries, and imbalances in risk
bearing and decision making capacity, all market participants are very far from
equal. The 2008 GFC revealed that eternal truth yet again in the case of OTC
derivatives and it did so across the globe in different legal, regulatory and financial
spaces. The financial markets, political and legal histories and cultures of South
Korea and the UK at first sight could not differ more. Yet this work, drawing on
the writer’s deep understanding of markets and practical experience as well as his
theoretical insights from a wide range of disciplines, shed light on what was essen-
tially a problem common to both countries. It represents a worthy contribution to
the comparative Law and Finance literature and will be of interest to many beyond
the shores of just the UK and South Korea.”
—Joanna Gray, Professor of Law School, University of Birmingham, UK
Junghoon Kim
Strategies of Financial
Regulation
Divergent Approaches in Conduct
of Business Regulation of Mis-Selling
in the UK and South Korea
Junghoon Kim
Yoido-Dong, Youngdeungpo-Gu
Financial Supervisory Service
Seoul, Korea (Republic of)
ISBN 978-981-15-7328-6 ISBN 978-981-15-7329-3 (eBook)

https://doi.org/10.1007/978-981-15-7329-3
© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer
Nature Singapore Pte Ltd. 2020
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the
publisher nor the authors or the editors give a warranty, expressed or implied, with respect to
the material contained herein or for any errors or omissions that may have been made.
The publisher remains neutral with regard to jurisdictional claims in published maps and
institutional affiliations.
This Palgrave Macmillan imprint is published by the registered company Springer Nature
Singapore Pte Ltd.
The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore
189721, Singapore
Preface
I was involved in settling mis-selling disputes of KIKO, a type of over-the-

counter derivatives, a couple of years later after the scandal occurred in
South Korea. Regulatory requirements such as the suitability rule or duty
to explain were key aspects of the KIKO mis-selling disputes. But in 2009
when the dispute broke out and even now, the financial regulation rule-
book in South Korea mainly consists of precise and clear rules, and the
suitability rule requiring only suitable instruments to be recommended to
clients and ‘duty to explain’ requiring that all material information be
explained to clients are vague regulations. This is because the meaning of
“suitable” and “material” is fluid, depending on the interpreter and the
circumstances. With my experience of interpreting and applying these
vague rules, I wanted to know whether and how other jurisdictions man-
age these vague requirements of conduct of business regulation.
So when I was given the opportunity to research financial regulation of
the UK, I was keen to pick up conduct of business regulation as the
research subject. What was most impressive to me about the UK conduct
of business regulation was that a large part of its rulebook was composed
of vague and abstract vocabularies and that the regulator and the regu-
lated of the financial services industry did not feel uncomfortable with the
“unprecise” rulebook. As the research went on, I realized that not only
the rule-making approach but also supervision and enforcement approach
of the two countries showed quite a contrast.
v
vi PREFACE
Globally, “what” should be regulated is decided by agenda-setters like

the Financial Stability Board and financial sector standard-setters like the
BCBS and IOSCO. These agenda-setters and standard-setters craft new
financial regulation and improve current ones in response to changes and
failures of financial markets. Thanks to these global organizations, the
conceptual standard of “what” to regulate is synchronized globally.
However, “how” to implement the developed conceptual standards is still
dependent on each jurisdiction. This situation and the contrasting
approaches I found between the UK and South Korea lead me to ask the
question of which implementation strategy might have better results. This
book is the answer to this question.
There can be diverging approaches in implementing the same standard
in the way of: making the standard into rules; supervising and enforcing
the rules; and designing the relationship between the newly made rules
and traditional private law. Examples of research about implementation
approaches include principle-based regulation, meta-regulation, risk-
based regulation, and responsive regulation. However, empirical study
supporting the implementation research of financial regulation is severely
lacking. Decades ago, National Styles of Regulation by Vogel, The Politics
of Legalism: Rules Versus Standards in Nursing-Home Regulation by
Braithwaite and Going by the Book by Bardach and Kagan provided vision-
ary empirical research about implementation of regulation in the area of
environmental and nursing-home policy. In the area of financial regula-
tion, this kind of empirical study is rare. Exceptionally, La Porta et al. was
a pioneering group of law and finance scholars who made progress in
empirical research about the correlation between legal origins and finan-
cial development, but the research has been criticized because of the lack
of specificity in understanding the causality between different implementa-
tion approaches of financial regulation and the results. One commenta-
tor’s analysis about the reason for the rarity of empirical and comparative
research from a legal perspective with respect to financial regulation is
because of compartmentalization which divides public and private law as
well as legal families whereas financial regulation is a research area demand-
ing a trans-disciplinary approach covering legal, economic, political, and
social perspectives.
PREFACE vii
This book conducts empirical study on implementation strategies of

financial regulation by comparative methodology. The main focus is con-
duct of business regulation but is complemented by analysis about pru-
dential regulation and credit rating agency regulation. The purpose of this
book is to draw general lessons about how to effectively implement finan-
cial regulation based on evidence of case studies.
Seoul, Korea (Republic of) Junghoon Kim

Acknowledgement
I would like to thank Professor Dong-Won Ko of Sungkyunkwan

University for giving me the courage to publish this book. The publication
of this book would not have been possible without his encouragement. I
would also like to express my deep thanks to Professor Joanna Gray and
Dr. Katharina Moser for their helpful comments and insights. My special
appreciation goes to Sophie Shin, my wife, who supported me throughout
the process.
Lastly, I give my thanks to my parents, my parents-in-law, and Yujin
and Geonha.
ix
Contents
1 Introduction and Research Framework 1
2 Rule-Making of COB 45
3 Public Enforcement of COB121
4 Private Enforcement of COB197
5 Lessons and Recommendation289
Bibliography319
Index357
xi
Abbreviations
CESR Committee of European Securities Regulators

COB Conduct of Business Sourcebook
COBS Conduct of Business Sourcebook
Core Rules Core Conduct of Business Rules
CP Commercial Paper
CPR 2014 Consumer Protection Amendment Regulations 2014
CSI Credit Suisse International
CSUK Credit Suisse UK Limited
DTI Department of Trade and Industry
FCA Financial Conduct Authority
FISCM Act Financial Investment Services and Capital Markets Act
FOS Financial Ombudsman Scheme
FSA 1986 Financial Services Act 1986
FSA Financial Services Authority
FSMA 2000 Financial Services Market Act 2000
FSS Financial Supervisory Service
IOSCO International Organization of Securities Commissions
IRHPs Interest Rate Hedging Products
ISDA International Swaps Derivatives Association
JPMIB JP Morgan International Bank
KFIA Korean Financial Investment Association
KIKO Knock In, Knock Out
LIBOR London Interbank Offered Rate
LTSB Lloyds TSB Bank
MiFID Markets in Financial Instruments Directive
xiii
xiv Abbreviations
PCBS Parliamentary Commission on Banking Standards

PCGID Presidential Committee on Government Innovation and
Decentralization
PFI Act Prevention of Fraud Investment Act
PRA Prudential Regulatory Authority
RBS Royal Bank of Scotland
SCARPs Structured Capital-At-Risk Investment Products
SE Act Securities and Exchanges Act
SFA Securities and Futures Authority
SIB Securities and Investments Board Ltd.
SMCR Senior Managers and Certification Regime
SRO Self-Regulatory Organization
TCF Treating Customers Fairly
Titan Titan Steel Wheel
WRIR Working Rules in Investment Recommendation
List of Cases
UK
Adrian Rubenstein v HSBC Bank [2011] EWHC 2304
Adrian Rubenstein v HSBC Bank [2012] EWCA Civ 1184
Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm)
Bankers Trust International plc v PT Dharmala Sakti Sejahtera [1996]
C.L.C. 518
Basma Al Sulaiman v Credit Suisse Securities (Europe) Limited, Plurimi
Capital LLP [2013] EWHC 400 (Comm)
Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg
AG [1975] AC 591
Bristol & West Building Society v Mothew [1998]
Camerata Property Inc. v Credit Suisse Securities (Europe) Ltd [2011]
EWHC 479 (Comm) 2011 WL 674989
City Index v Leslie [1992] 1 QB 98Credit Suisse International v Stichting
Vestia Groep [2014] EWHC 3103
Crestsign Ltd v National Westminster Bank plc and Royal Bank of Scotland
plc [2014] EWHC 3043 (Ch)
Grant Estates Limited v The Royal Bank of Scotland Plc [2012] CSOH 13
Hazell v Hammersmith & Fulham [1992] 2 AC 1
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
Henderson v Merrett [1995] 2 AC145
Investors Compensation Scheme v West Bromwich Building Society
[1999] Lloyds Rep.PN496
xv
xvi LIST OF CASES
John Green and Paul Rowley v The Royal Bank of Scotland Plc
[2012] EWHC 3661
John Green and Paul Rowley v The Royal Bank of Scotland Plc [2013]
EWCA Civ 1197
JP Morgan Chase Bank and Others v Springwell Navigation Corporation
[2008] EWHC 1186
L’ESTRANGE V GRAUCOB [1934] 2 KB [394]
Loosemore v Financial Concepts [2001] Lloyd’s Rep PN 235
Morgan Grenfell v. Welwyn Hatfield District Council [1995] 1 All ER1
Morgan Stanley UK Group v Puglisi Cosentino [1998] C.L.C. 481
Nextia Properties Limited v National Westminster Bank plc and The Royal
Bank of Scotland plc [2013] EWHC 3167 (QB)
Peekay Intermark Ltd and another v Australia and New Zealand Banking
Group Ltd [2006] EWCA 386
R v Financial Services Authority [2011] EWHC 999 (Admin)
R (Holmcroft Properties Ltd) v KPMG [2016] EWHC 323 (Admin)
Shore v Sedgwick Financial Services Ltd [2008] PNLR 244
Standard Chartered Bank v Ceylon Petroleum Corporation [2011]
EWHC 1785 (Comm)
Thornbridge Limited v Barclays Bank Plc [2015] EWHC 3430
Titan Steel Wheels Ltd v The Royal Bank of Scotland plc [2010] EWHC 211
White v Jones [1995] 2 A.C.
Zaki & others v Credit Suisse (UK) Limited [2011] EWHC 2422
(COMM); [2012] EWCA Civ 583
South Korea
Constitutional Court of Korea, 1992. 2. 25, 89 Hunga 104
Constitutional Court of Korea, 1992. 4. 28, 90 Hunba 27
Constitutional Court of Korea, 1994.07.29, 92 Hunba 49
Constitutional Court of Korea, 1996. 8. 29, 94 Hunba15
Constitutional Court of Korea, 1999.01.28, 97 Hunga 8
LIST OF CASES xvii

Constitutional Court of Korea 2003.11.27, 2003 Hunba 2
Constitutional Court of Korea, 2008. 1. 17, 2007 Hunma 700
Constitutional Court of Korea, 2010.10.28, 2008 Hunma 638
Constitutional Court of Korea, 2010.4.29. 2008 Hunba 118
Seoul Central District, 2013.9.6, 2011 Gahap 122683
Seoul Jipan 1998.6.6, 97 Gahap 21049
Seoul Jipan 2000.2.1, 99 Gahap 5212
Supreme Court, 2013.9.26, 2012 Da 1153
Supreme Court, 2013.9.26, 2012 Da 13637
Supreme Court, 2015.1.29, 2013 Da 217498
Supreme Court, 1994.3.1, 93 Da 26205
Supreme Court, 2015.9.15, 2015 Da 216123
List of Tables
Table 3.1 Regulator’s sanction against ‘mis-selling’ of over-the-counter

derivatives in UK 131
Table 3.2 Regulator’s sanction against ‘mis-selling’ of over-the-counter
derivatives in South Korea 149
Table 4.1 Summary of cases related with ‘mis-selling’ of over-the-counter
derivatives between financial institutions and consumers 220
xix
CHAPTER 1
Introduction and Research Framework
1.1 The Purpose of the Book

Financial mis-selling began occurring in advanced financial markets such
as the US and the UK from the early 1990s. During the 1990s in the US,
‘mis-selling’ disputes about over-the-counter derivatives started to become
a matter of public concern, which involved the California District
Government of Orange County, Procter & Gamble, and many other pri-
vate and public entities.1 In the UK, from the 1990s, disputes concerning
‘mis-selling’ of over-the-counter derivatives reached courts despite not
attracting public attention as in the US.2
Since then, with the progress of financialization and the rise of the level
of income, financial mis-selling has become a common problem shared by
many jurisdictions. The global financial crisis showed this global trend of
‘mis-selling’ vividly. Macro-economic indicators such as currency exchange
rates and interest rates showed great volatility during the crisis and in its
aftermath, which resulted in unexpected, significant losses for end-users of
investment instruments. The International Monetary Fund reported that
1
United States Congress Committee on Banking, Finance and Urban Affairs, H.R. 4503,
‘The Derivatives Safety and Soundness Supervision Act of 1994: hearing before the
Committee on Banking, Finance, and Urban Affairs, House of Representatives, One
Hundred Third Congress second session’ (1994), https://archive.org/details/hr4503deriv-
ative00unit, accessed 10th June 2015.
2
See Table 4.1 at p. 220.
© The Author(s) 2020 1

J. Kim, Strategies of Financial Regulation,
https://doi.org/10.1007/978-981-15-7329-3_1
2 J. KIM
50,000 non-financial firms in many developing and developed countries

suffered significant losses from over-the-counter derivatives contracts dur-
ing the crisis.3
Because mis-selling of investment instruments can shake lives of ordi-
nary households and destroy financial stability of small and medium sized
enterprises (hereafter ‘SMEs’), it can turn into a social and political issue
and become one of the major regulatory targets. As such, financial regula-
tors of developed capital markets have crafted conduct of business regula-
tion (hereafter ‘COB’) such as information disclosure, suitability duty, and
product intervention to prevent mis-selling of financial services and the
COB has spread to other jurisdictions.
However, there are two major challenges to adopting and implement-
ing the COB. The first challenge comes from the fact that COB’s rules are
not specific and clear rules but general standard rules. General standard
rules describe the regulatory objective and do not specify detailed proce-
dures or measures, and so discretionary judgement is required to deter-
mine whether compliance has been achieved depending on the
circumstances. For example, suitability duty requires financial institutions
to recommend only suitable products to investors, and suitability can be
determined based on each investor’s capability and wealth; information
disclosure duty requires financial institutions to provide all information
that is important for the investment decision and so discretionary judge-
ment is needed about what is important information for each investor. As
such, jurisdictions that do not have prior experience of operating general
standard rules in their regulatory system are highly likely to fail in achiev-
ing the intended goal of the COB.
The second challenge to implementing the COB is that it is likely to
conflict with principles of private law which has governed contracting in
commerce for centuries. For example, private law holds caveat emptor as
one of its basic principles in commercial transactions while the COB
demands fiduciary duty, or at least equivalent duty, on sellers, i.e. financial
institutions. The basic assumption of the COB is that transactions between
financial institutions and unsophisticated investors cannot be arm’s length
contracts. Because the COB’s requirements conflict with the traditional
order set by private law, they are difficult to enforce.
3
Randall Dodd, ‘IMF Working Paper: Exotic derivatives losses in emerging markets: ques-
tions of suitability, concerns for stability’ (2009) 3, available at www.financialpolicy.org/kiko.
pdf, accessed 17th November 2014.
1 INTRODUCTION AND RESEARCH FRAMEWORK 3
The book explores such challenges that deter achievement of the objec-
tives of the COB and discusses ways to overcome them. For this purpose,
the book is based on case studies of COB regimes of the UK and South
Korea, in particular mis-selling cases of over-the-counter derivatives.
Albeit that there is a large spectrum of financial instruments, such as
investment, insurance, and deposit and lending products, with the poten-
tial of incurring financial mis-selling, this book’s focus on over-the-counter
derivatives comes from that over-the-counter derivatives show the causes
and devasting consequences of mis-selling with the most clarity. First,
over-the-counter derivatives are more vulnerable to mis-selling than other
financial instruments because of the significant informational asymmetry
between consumers and sellers. While the financial services industry is
notorious for information asymmetry,4 the over-the-counter derivatives
market is one of the worst areas even in the industry. Derivatives are unfa-
miliar products compared to other commonly transacted financial prod-
ucts like loans and insurance.5 Consumers have limited knowledge of
derivatives markets. Even large corporations’ financial comptrollers who
have substantial knowledge and experience in financial markets cannot
understand the structure and risks of complex over-the-counter derivatives
by themselves. It is practically impossible for consumers, even corporate
clients, to compare the price and other terms of non-standardized over-
the-counter derivatives offered by different financial institutions.6
Therefore, consumers with insufficient information and knowledge have
to rely on salespersons’ explanations of over-the-counter derivatives.
Second, on the supply side, over-the-counter derivatives transactions
are more lucrative for financial institutions compared to other generic
financial products.7 The attractive margins lead to pressure on salespersons
to achieve high sales volume. This pressure isn’t only business-driven, but
4
David Llewellyn, The economic rationale for financial regulation (Financial Services
Authority, 1999) 25–26 available at www.fsa.gov.uk/pubs/occpapers/op01.pdf, accessed
6th October 2017.
5
Robert Baldwin, Martin Cave and Martin Lodge, Understanding regulation (Oxford
University Press, 2011) 18.
6
Robert E Litan, The Derivatives Dealers’ Club and Derivatives Market Reform: A Guide
for Policy Makers, Citizens and Other Interested Parties (Initiative on Business and Public
Policy at Brookings, 2010) 17.
7
Financial Crisis Inquiry Commission, and United States, Financial Crisis Inquiry
Commission, The financial crisis inquiry report: Final report of the national commission on the
causes of the financial and economic crisis in the United States (PublicAffairs, 2011) 50.
4 J. KIM
also self-inflicted due to the personal sales-based compensation system.

The lucrative profit and generous personal compensation can create blind-
ness8 to the interest of consumers, if not opportunism.9 The combination
of the reliance and sales performance pressure makes over-the-counter
derivatives more vulnerable to mis-selling.
Third, the size of losses from over-the-counter derivatives tends to be
extensive. The leverage used by over-the-counter derivatives can cause
losses significantly exceeding the investment principal and can even drive
the investor into bankruptcy. In fact, many companies that incurred losses
in derivatives transactions ended up in bankruptcy. Thus, a mis-selling
scandal involving over-the-counter derivatives can create a huge economic,
social, and political disturbance and so the failure to prevent or adequately
manage such a scandal can greatly damage the public’s confidence in the
financial market. So, it is critical for the vitality and sustainability of the
financial market to prevent extensive ‘mis-selling’ scandals of over-the-
counter derivatives.
This book seeks to provide practical guidance to the policymakers and
the financial regulators for redesigning COB. Thus it is an important goal
of the book to derive normative and practical conclusions. To achieve this
goal, the thesis adopts the comparative methodology in analysing the
COB regimes of the UK and South Korea. The comparative study of the
two countries’ COB regimes offers understanding of the nature of differ-
ent regulatory strategies and finally identification of the resulting differ-
ence. Comparative study provides the insight which cannot be obtained
by just analysing one regime on its own. Without a comparator, it is almost
impossible to identify the causal relationship for certain aspects of regula-
tion and their results.10 Section 1.2 discusses more about why the com-
parative approach is valuable for this book.
8
‘Informational Asymmetry and OTC Transactions: Understanding the Need to Regulate
Derivatives’ (1997) 22 Del. J. Corp. L. 197, 205.
9
Dan Awrey, ‘Toward a supply-side theory of financial innovation’, 23, available at http://
ineteconomics.org/uploads/papers/Awrey-Paper.pdf; Andromachi Georgosouli, ‘The
debate over the economic rationale for investor protection regulation: a critical appraisal’
(2007) 15.3 Journal of Financial Regulation and Compliance 236, 239.
10
Geoffrey Wilson, ‘Comparative legal scholarship’ in Michael McConville and Wing
Hong Chui (eds), Research methods for law (Edinburgh University Press, 2007) 87; Gerhard
Danneman, ‘Comparative law: Study of similarities or differences?’ in Mathias Reimann and
Reinhard Zimmermann (eds), The Oxford handbook of comparative law (OUP Oxford, 2006)
398, where the author commented that “even if comparative law cannot deliver full proof of
The reason for selecting the UK and South Korea as comparator juris-
dictions is that the two countries have ‘controlled differences’ in relation
to COB.11 Jansen said that comparative study can be seen as the social
sciences’ equivalent of experiments.12 In an experiment, except for the
variables for which the causal relationship is being tested, all other factors
must be controlled. In the ‘experiment’ of this book, the effects of diverged
approaches in rule-making and rule-enforcing of COB are being mea-
sured. In the area of COB, the UK and South Korea have contrasting
differences at the implementation level, but they share ‘controlled’ similari-
ties in regulatory objectives and governances.
The most important similarity is that both countries have the same
problem of financial ‘mis-selling’, and so share the same regulatory objec-
tive to prevent it. The two countries experienced huge ‘mis-selling’ scan-
dals of over-the-counter derivatives during the global financial crisis and so
share the experience of their public and private legal systems handling the
scandals. Both countries have an open and mature economy where many
SMEs and individual investors have the need to invest in or hedge with
over-the-counter derivatives. For comparative research, the compared
jurisdictions must have commonality in their issues and policy goals.13
As the second similarity, the two countries have similar financial regula-
tory governances although they operate under different legal origins of
the civil law and common law systems.14 In both countries, the mecha-
nisms of how COB operates within the legal system are similar. For exam-
ple, financial regulation, which is a branch of public law, intervenes in
transactions of financial instruments, which have traditionally been the
domain of private law, by imposing obligations on financial institutions in
a causal link between rule and effect, it can still produce more evidence for such a link than an
enquiry which limits itself to one legal system”.
11
Gerhard Danneman, ‘Comparative law: Study of similarities or differences?’ in Mathias
Reimann and Reinhard Zimmermann (eds), The Oxford handbook of comparative law (OUP
Oxford, 2006) 410.
12
Nils Jansens, ‘Comparative law and comparative knowledge’ in Mathias Reimann and
Reinhard Zimmermann (eds), The Oxford handbook of comparative law (OUP Oxford,
2006) 318.
13
Ralf Michaels, ‘The Functional Method of Comparative Law’ in Mathias Reimann and
2006) 367.
14
Konrad Zweigert and Hein Kotz, An Introduction to Comparative Law (Oxford
University Press, 1998) 315–328.
6 J. KIM
terms of the contractual relationship between sellers and buyers. Regarding

breaches of financial regulation, both countries have two enforcement
tools: public sanction by the regulator and private action by aggrieved
consumers. In addition, South Korea referenced the UK’s Financial
Services and Markets Act (‘FSMA’) 2000 and related statutory regulation
in making the COB of the Financial Investment Services and Capital
Markets Act (hereafter ‘FISCM Act’).15 Thus two countries’ COB require-
ments are conceptually very similar.
However, at the implementation level, the COB regime on ‘mis-selling’
of financial instruments significantly differs between the two countries.
South Korea’s rule-making is rule-based and enforcement is oriented
toward deterrence, whereas the UK’s rule-making is principle-based and
enforcement is compliance-focused. Although both countries have the
same regulatory goal of preventing ‘mis-selling’, the different implemen-
tation strategies are creating very different results. Therefore, a compara-
tive study of the two countries provides good observation opportunities
about the results of different approaches in rule-making and rule-enforcing,
as Levi argued that only with variations can associations between variables
and outcomes be established.16
As the home country of the common law system, the UK exemplifies
the case where the long-standing principles of private law collide with the
COB to deter the achievement of the goal of COB. South Korea with the
civil law legal tradition has the constitutional ‘clarity principle’ which
requires all regulatory duties to be defined by clear and specific rules in
law. Therefore, South Korea has minimal experience of operating general
standard rules and this has caused regulatory failures in the process of
operating the COB. The purpose of the book is to use the findings from
the case study of the two regimes, to suggest methods of reform for pre-
venting and dealing with mis-selling disputes effectively and to provide
other jurisdictions with lessons for operating a COB regime effectively.
The diverging implementation approaches in the two countries can be
connected to their different legal origins. Ogus explained that countries of
common law and civil law system have different approaches to conferring
power and discretion on regulatory agencies and rendering them
Ministry of Finance and Economy, ‘Explanation Material on FISCM Act Bill’ (2006).
15
David Levi-Faur, Handbook on the Politics of Regulation (Edward Elgar Publishing,

16
2011) 178.
accountable.17 Thus, Siems advises a comparative research choosing legal

systems which are neither too similar nor too different, such as a civil law
and a common law country with the similar societal development level.18
His point was that comparing too similar or too different legal systems
doesn’t produce meaningful findings: uninteresting result or comparisons
between ‘apples and oranges’. Based on Siems’ argument, South Korea
and the UK, which have different legal origins but share similar regulatory
goals and governances, are a good basis for comparative research.
Regulation being a cross-disciplinary field of study related to law, poli-
tics, and economics, it cannot be investigated by a dominant framework
from any one discipline. Moreover, without practical guidance, the prin-
ciples for ‘better regulation’ may contradict each other.19 And so if only a
purely theoretical approach is employed in looking at how the rules should
be framed and enforced, there can be limitations to identifying an effective
regulatory strategy. Thus, an evidence-based approach is needed. Advice
on how to formulate rules and enforce them can be practical only when it
is founded on specific cases.20 Thus, the book employs a comparative study
of important practical aspects of the COB regimes of the two jurisdictions.
However, just comparison alone isn’t enough to find ‘better regulation’.
The book employs theoretical insights drawn from regulatory theory
about rule-design and enforcement strategies in order to evaluate the
effectiveness of these regimes, which is explained in the following
Sect. 1.2.2.
The book analyses the COB regimes of South Korea and the UK based
on comparative methodology and regulatory theory, and the findings are
as follows:
1. Rule-making: The UK formulates its rulebook using various rule-

types such as Principles, Rules and Guidance and this enables the
COB regime to be able to build foundation to satisfy both stability
17
Anthony Ogus, ‘Comparing regulatory systems: institutions, processes and legal forms
in industrialised countries’ (2004) Leading Issues in Competition, Regulation and
Development, 146, 160.
18
Mathias Siems, Comparative Law (Cambridge University Press, 2014) 15–16.
19
Christopher Hood, The Government of Risk: Understanding Risk Regulation Regimes
(OUP Oxford, 2001) 180; Robert Baldwin, Christopher Hood, and Henry Rothstein,
‘Assessing the Dangerous Dogs Act: when does a regulatory law fail?’ (2000) Public Law,
282, 300.
20
Edward J. Eberle, ‘Comparative Law’ (2007) 12 available at http://ssrn.com/
abstract=1019051, accessed 9th August 2017.
8 J. KIM
and rationality; South Korea, due to constitutional, political, and

historical constraints, creates a rulebook with only precise and clear
rules, which, as a result, is one of the causes for the overall COB
regime’s rigid legalism.
2. Rule-enforcing: The UK relies on the goodwill and capability of the
regulated firms and selects the compliance-focused enforcement
approach but in the end, such a soft enforcement strategy based on
one-way trust has failed in internalizing the regulatory objectives into
the firms’ norms. South Korea’s deterrence-focused enforcement has
produced regulatory failure in that the regulator as well as the regulated
firms focus on the letters of rules instead of the regulatory objectives.
3. Private enforcement: In the UK, there is dissonance between the
principles of private law and the COB in dealing with mis-selling of
derivatives. Because the court adjudicates based on the principles of
private law, this sometimes results in confusing situations where an
action is subject to sanctions under the COB but not recognized as
a liability under private law. In South Korea, because the COB is
binding on the courts, there is no dissonance between the COB
standards and private law. Rather, the court’s approach of focusing
on the substance of the COB requirements is complementing the
regulator’s standardized enforcement which is more focused on
procedural requirements.
4. Recommendation: In the UK, one of the biggest causes for regula-
tory failure is the defective culture in the financial services industry,
and the dissonance of orders between private law and COB contrib-
utes to the defective culture. The recommendation for the UK is to
harmonize the dissonant orders by placing the COB as the mini-
mum requirement of the private law. For South Korea, the recom-
mendation is to shift the whole regulatory system from command
and control regulation to decentred regulation. For this fundamen-
tal reform, the establishment of a cultural infrastructure based on
the regulatee’s and the regulator’s professionalism and cooperative
partnership is critical.
Although there has been much research done on the general theories of
regulatory rule-making and rule-enforcing, there is, as Pizzolla stated,21 a
21
Agnes Pizzolla, ‘Comparative Law and Financial Regulation’ [2011] 3.2 Irish Journal of
Legal Studies 118.
significant lack of comparative law research on financial regulation and

almost none specializing in COB. The book applies the accumulated theo-
ries of comparative law and regulation to COB to analyse the causes of
regulatory failures and to suggest ways for improvement in the UK and
South Korea. However, the book’s research is not confined to the COB. Its
broader aim is to draw general lessons in rule-making and enforcement for
redesigning financial regulation. For this purpose, the analysis framework
set for evaluating COB regimes is extended to prudential regulation of
banking sector and regulation of credit rating agencies. For this purpose,
the analysis framework set for evaluating COB regimes is extended to pru-
dential regulation of banking sector and regulation of credit rating agen-
cies. COB, liquidity regulation, and CRA regulation commonly
experienced regulatory failures during the global financial crisis: wide-
spread mis-selling disputes, bank-run and liquidity depletion in regulated
banks, and fraudulent credit ratings of investment instruments. The book
suggests general lessons for strategies of financial regulation in rule-making
and enforcement through cause-result analysis of the regulatory failures.
1.2 Theoretical Frameworks

The book is based on not one but two distinct theoretical frameworks. It
uses both comparative law research and regulatory theory. The section
provides explanation about the comparative law applied in analysing the
COB regimes of the UK and South Korea and the regulatory theory used
as the basis for evaluating the two regimes.
1.2.1 Theoretical Frameworks of Comparison
1.2.1.1 Comparative Law and Its Purposes

In the simplest terms, comparative law can be said to be a way of looking
at law.22 Kahn-Freund’s explanation of comparative law is that it is a meth-
odology for understanding foreign law including the entire legal system,
institutions, and rules, and involving the juxtaposition and contrast of
findings and comparisons in order to identify similarities and differences.
22
Esin Örücü, ‘Developing comparative law’ in Esin Örücü and David Nelken (eds),
Comparative law: A handbook (Bloomsbury Publishing, 2007) 45–48.
10 J. KIM
In this sense, the comparative method is both an empirical and descriptive

research method.
Among the multiple purposes of comparative law,23 its purpose in the
book is to provide ‘law reform and policy development’ in the regulation
of financial ‘mis-selling’. Örücü argued that comparative law research can
provide a list of models to choose from,24 and that policy-makers can
derive answers by comparing systems which share the same problem but
deal with it in ‘better ways’.25 The following sections discuss how to find
better ways through comparative law.
1.2.1.2 Methodology of Comparison

Samuel stressed that posing the proper question for comparative legal
study, like any research, is critical for its success.26 One of the most impor-
tant points in formulating questions, according to him, is that the reason
why a comparative approach is fundamental should be built into the
research question. Thus the answers to the research questions should be
able to be obtained only ‘through bringing together objects of compari-
son’. The reason why this book chooses a comparative method was
explained in Sect. 1.1.
Örücü advised that formulating questions is related to concept build-
ing; the concept should not be so broad as to be meaningless nor too
narrow in coverage.27 This book builds the concept: rule-making and rule-
enforcing in COB regime for regulating ‘mis-selling’ of derivatives. The
concept built here is ‘flexible and large enough to embrace heterogeneous
legal institutions’ of South Korea and the UK.28
After posing the question, the researcher should describe, juxtapose,
and identify similarities and differences.29 He should begin with facts and
end in description. Similarities and differences brought to light by the
23
Ibid., where the author presented the five purposes of comparative law: law reform and
policy development for the legislator, aid to the international practice of law, international
harmonization and unification, common core research, and a gap-filling in law courts.
24
Esin Örücü, ‘Developing comparative law’, 54.
25
Esin Örücü, The enigma of comparative law: variations on a theme for the twenty-first
century (Springer, 2013) 14–20.
26
Geoffrey Samuel, An introduction to comparative law theory and method (Vol. 11.
Bloomsbury Publishing, 2014) location 759 (kindle edition).
27
28
Konrad Zweigert, Hein Kötz and Tony Weir, Introduction to comparative law (Oxford:
Clarendon Press, 1998) 43, where the authors explain this as to “build a system”.
29
Nils Jansens, ‘Comparative law and comparative knowledge’, 309.
comparison are then identified.30 Here, it should be clear as to what com-

pared. Örücü answered that the traditional approach is of a positivist:
statutory rules, case law and pertinent legal documents, but that law goes
far beyond the so-called ‘official law’ and extends to ‘multi-layers of sys-
tems’.31 He stressed that statutory rules alone cannot be the object of
comparative research, but that what the researcher should compare, as
tertium comparasonis, is ‘common function between institutions and
rules, the common goal they set out to achieve, the problem to solve’.32
He added that tertium comparasonis is a flexible choice about which
aspects of the law might benefit from the additional knowledge from com-
parison.33 As to the object of comparison, this book encompasses not only
rule-making but also rule-enforcing. Different approaches of rule-
enforcing even with the same rules may produce different results, and so
rule-enforcing is the aspect of law which can benefit from comparison.
After identifying similarities and differences, the researcher ventures
into the task of explanation.34 Jansen argued that the explanation for dif-
ferences and similarities needs not only legal reasoning but also contextual
factors which explain why the legal systems have produced the institutions
they have. For this, Örücü contended the need for a contextual approach
in analysing rules and institutions, such as ‘historical context’, ‘political
context’, and ‘cultural context’.35 Ideally, macro- and micro-comparison
should merge, since the micro-comparative topic must be placed within
the entire legal system.36 Ehrlich argued that the researcher must under-
stand the relationship between legal systems and legal cultures as well as
find rules that are not necessarily within the formal framework of the legal
system but are held by the society.37 He added that legal culture has
30
Gerhard Danneman, ‘Comparative law: study of similarities or differences’ in Mathias
Reimann and Reinhard Zimmermann (eds), The Oxford handbook of comparative law (OUP
Oxford, 2006) 399.
31
32
Ibid., 47.
33
Nils Jansen, ‘Comparative law and comparative knowledge’ in Mathias Reimann and
2006) 313.
34
Nils Jansens, ‘Comparative law and comparative knowledge’, 309–313.
35
36
Bloomsbury Publishing, 2014) location 1266.
37
Eugene Ehrlich and Klaus A. Ziegert, Fundamental principles of the sociology of law
(Routledge, 2017) ch XV.
12 J. KIM
s ubstantive influence on the operation of the legal institution via the users’
attitudes, beliefs and emotions. So, he defined legal culture as the centre
of gravity of legal developments; something which doesn’t lie in legislation
but in society itself. Under this broad approach, the researcher should
move away from the ‘law as rules’ attitude because law cannot be under-
stood properly unless it is explained within broad historical, political, and
socio-economic contexts.38 The book, in explaining the differences
between the COB regimes of the two countries, considers the legal tradi-
tion, political and economic contexts. How these factors influence the
shaping of COB regimes is discussed in Sect. 1.2.2.5.
Functional Method
The book adopts functionalism as the comparative methodology for ana-
lysing the COB regimes of South Korea and the UK. According to Örücü,
under the functional method, the researcher looks at a litigation problem
in one system and having done this, she then asks how such a problem
would be solved in another legal system.39 Michaels explained that a func-
tional method focuses not on the rules but their effects and not on the
doctrinal structures but the events and so as a result, the object of research
is the judicial decisions made to address the situations in the real world.40
In the book, the public and private enforcement cases can be seen as the
case law and judicial decisions referred to by Örücü and Michaels.
Thus, the functional method focuses on the facts of cases and so is a
‘bottom-up’ approach.41 Gerber argued that the analysis of comparative
law should start at the problems themselves and that such an approach
enables a meaningful comparison.42 He continued that the objective of the
functional method is to understand how rules operate and so rules should
be studied in connection with a specific problem rather than solely as the
central object of the study.
38
Henry Walter Ehrmann, Comparative legal cultures (New Jersey: Prentice-Hall, 1976) 9.
39
40
Ralf Michaels, ‘The functional method of comparative law’, 341.
41
Bloomsbury Publishing, 2014) location 1821.
42
David J. Gerber, ‘Sculpting the agenda of comparative law: Ernst Rabel and the facade
of language’ (2001) 190, 190 available at: http://scholarship.kentlaw.iit.edu/fac_
schol/247, accessed 30th September 2018.
Therefore, for the functional method to be applied, the social needs

and the problems identified must be universal.43 In other words, if a prob-
lem arises in one legal system but has no counterpart in another, this
method can reveal nothing.44 In the context of the book, a comparison of
regulation on derivatives mis-selling will be meaningless if done with soci-
eties where derivative transactions are not active. Michaels highlighted this
point by explaining that societies should be in similar stages to have a
meaningful comparison.45 One of the reasons that the book selected South
Korea and the UK as comparator jurisdictions is because they have the
similar economic environment that necessitate over-the-counter deriva-
tives transactions and so there is the common issue of ‘mis-selling’.
Finding Better Law

As the final step in comparative research, Zweigert and Kötz argued that
the researcher should be interested in suggesting the way to ‘better law’.46
However, searching for ‘better law’ should involve the process of evalua-
tion.47 Michaels argued that it isn’t easy for comparative legal research to
move from fact to norm,48 because comparative material cannot provide
guidelines about ‘better law’ and even the commonality of laws cannot
have normative force for it. Örücü also pointed out that the legitimacy of
using comparative law to search for ‘better law’ is questionable.49 These
arguments mean that just identifying differences and explaining the causes
cannot provide sufficient rationale to choose one as ‘better law’.
Michaels argued, considering the above limits of the functional method,
that the criteria of evaluation should be placed outside the function itself,
such as ‘costs of an institution’.50 He continued that evaluation should
belong to the area of the policy decisions and be a practical judgement
under partial uncertainty. He concluded that the functional method can
43
44
45
46
Konrad Zweigert, Hein Kötz and Tony Weir, Introduction to comparative law (Oxford:
Clarendon Press, 1998) 45.
47
Esin Örücü, ‘Developing comparative law’, 49; Mathias Siems, Comparative Law
(Cambridge University Press, 2014) 22–23.
48
Ralf Michaels, ‘The functional method of comparative law’, 373–375.
49
50
14 J. KIM
improve the quality of policy decisions by providing alternatives and infor-

mation. Based on Michaels’ argument, the book chooses ‘effectiveness’ as
the criteria of evaluation of COB regimes in the two countries, which is
‘outside the function’ of COB. How to define and evaluate effectiveness
of COB is discussed in the next section.
1.2.2 Theoretical Framework of Evaluation

In order to evaluate the effectiveness of COB regimes, the objective of
COB should be clarified first. As financial instruments traded in the capital
markets become more complicated, dependence of consumers on financial
institutions has deepened, which makes the relationship between the con-
sumer and financial institutions somewhat fiduciary in nature.51 One of the
main objectives of COB is to mitigate the agency problem originating
from the intermediary-client relationship. In order to prevent intermedi-
aries from abusing the trust of consumers, COB prescribes duties of finan-
cial institutions. Such centrally prescribed duties are rationalized because
they reduce the transaction costs which otherwise individual consumers
should bear to design specific contractual provisions for their own protec-
tion.52 However, this aspect of COB protecting idiosyncratic consumers
with generic requirements poses difficulties in finding tailor-made solu-
tions for each consumer.53 For some consumers with sufficient experience
and resources, the requirements for investor protection placed by COB
are not only unnecessary but obstacles in their investment. One of the
devices to solve this issue in COB is the consumer classification system.54
But this broad classification system which categorizes the whole popula-
tion of consumers into three groups such as eligible counterparties, pro-
fessional clients and private customers isn’t detailed enough to differentiate
each consumer’s diverging knowledge and circumstances. Therefore, how
to provide the proper level of protection to each consumer is one of the
most challenging issues in COB regimes.
51
Alessio M. Pacces (2000) 20.4 International Review of Law and Economics 479, 482;
Mads Andenas and Iris HY Chiu, The foundations and future of financial regulation:
Governance for responsibility (Routledge, 2013) 25.
52
Frank H. Easterbrook and Daniel R. Fischel, ‘Contract and fiduciary duty’ [1993] 36.1
The Journal of Law and Economics, 425.
53
John Armour, Principles of Financial Regulation (Oxford University Press, 2016) loca-
tion 7985.
54
Financial Services Authority, Customer Classification (Consultation Paper 43, 2000).
The approach to achieving the COB’s objective of providing a proper

level of protection to each consumer can diverge. One extreme is to define
detailed procedural requirements on transactions of financial instruments
and to enforce them stringently. This approach can make regulatory
actions predictable but may damage the reasonableness of the actions. The
other extreme is to set a broad and vague regulatory goal in a rulebook
and to focus on supporting the regulatee to achieve it. This approach may
enhance the reasonableness of regulatory actions but can deteriorate pre-
dictability and certainty.
Effectiveness of Regulation as a Benchmark for Jurisdictional Comparison

Yeung saw regulatory effectiveness as a collective concept, a ‘cluster of
goals’ such as clarity, predictability, flexibility, and responsiveness, which
may compete with each other.55 She implies that pursuing one regulatory
goal may come at the sacrifice of another regulatory goal.
A regulatory regime generally pursues two values, each of which is a
cluster of goals stated above.56 The first is stability. Stability means that the
regulatee should be able to have clarity and predictability about regulatory
intervention. For this, a regulatory regime should explain what activities
are permitted and what are not in advance.57 In addition to clarity, the
consequences of conducting non-permitted activities should be predict-
able. Then the regulatee can plan their activities for the future and pursue
their interests within the permitted boundaries. Regulation can provide
benefits not only from regulatory interventions but also from the regula-
tee being able to plan their behaviours.58 A regulatory regime with insuf-
ficient clarity and predictability may deter socially desirable activities.59 In
the context of COB, stability will be enhanced when financial institutions
can clearly understand what products and marketing methods are permis-
sible by COB.
55
Karen Yeung, Securing compliance: A principled approach (Bloomsbury Publishing,
2004) 31.
56
Ibid., 30–36.
57
Nicola Lacey, The jurisprudence of discretion: escaping the legal paradigm (Clarendon
Press, 2002) 361–363; James Q. Wilson, Bureaucracy (Basic Books, 1989) 335.
58
Karen Yeung, Securing compliance: A principled approach, 33–34.
59
John Armour, Principles of Financial Regulation (Oxford University Press, 2016) loca-
tion 18707–18747 (kindle edition).
16 J. KIM
The other regulatory value is rationality.60 Rationality means regulatory

actions should be flexible in achieving the purpose of the regulation and
responsive to the changing environment.61 Legal formalism often ignores
the substance of regulation by adhering to letters of rules,62 and thus inevi-
tably brings about blind adherence to letters of the law and failure to
achieve what rules target.63 Flexible regulatory action allows the spirit of a
rule to be realized. Responsiveness in a regulatory regime is its adaptability
to the changing environments.64 Rule-makers cannot anticipate all the
contingencies of the future; thus, current rules can be useless or counter-
effective in achieving the policy goal in situations that were not antici-
pated. In the context of COB, rationality means that rules should be made
and enforced in a way to ensure that the ultimate regulatory objective is
achieved, or in other words, increasing consumers’ welfare by preventing
‘mis-selling’.
The foregoing explains that a regulatory regime should pursue both
the values of stability and rationality. It can be said that stability can be
enhanced by precise rules while rationality by discretion. The dilemma is
that the two regulatory values are in many cases contradictory.65 Stressing
stability of a regulatory regime can work in an opposite direction to ratio-
nality of the regime, and vice versa.66 Both regulatory values are important
for the welfare of society; thus, it is important to remember that a trade-
off relationship exists between them.67
60
William F. West, Administrative Rule-making: Politics and Processes (Greenwood Press,
1985) 189–195.
61
62
Kenneth Culp Davis, Discretionary justice: A preliminary inquiry (LSU Press, 1969) 25.
63
Eugene Bardach and Robert Allen Kagan, Going by the book: The problem of regulatory
unreasonableness (Transaction Publishers, 1982) Ch III.
64
65
William F. West, Administrative Rule-making: Politics and Processes, 15–31; James
Q. Wilson, Bureaucracy (Basic Books, 1989) 315–332.
66
Philip Rawlings, Andromachi Georgosouli and Costanza Russo, ‘Regulation of financial
services: Aims and Methods’ (2014) Queen Mary University of London, Centre for Commercial
Law Studies, 36.
67
Kenneth Culp Davis, Discretionary justice: A preliminary inquiry (LSU Press, 1969) 27;
Colin Scott, ‘Standard-Setting in Regulatory Regimes’ (April 16, 2009) 9–12 University
College Dublin Law Research Paper No. 07/2009, available at SSRN: https://ssrn.com/
abstract=1393647, accessed 8th December 2016.
The trade-off relationship between stability and rationality exists in the

COB regime, too.68 Therefore, the book defines the effectiveness of the
COB as how well the two contradictory values are balanced in rule-making
and rule-enforcing.
Cause of the Trade-Off Relationship

The trade-off relationship between stability and rationality is deeply
related to the rules’ limitations.69
The most commonly known function of rules is to enable control over
the extent of discretion the governmental officials can have in executing
administrative actions.70 Davis argued that most of the injustice in govern-
ment interventions is due to officials relying on discretion instead of rules
and that such discretionary power should be restricted through rules.71
Rules prevent abusive discretion by ensuring consistent government inter-
vention, irrespective of time or subject. In addition, because rules can
provide the criteria needed for decision-making, they can prevent mistakes
and regulatory capture in decision-making.72
However, rules are not perfect. Limitations that rules have in relation
to administrative decision-making can be summarized as inclusiveness and
indeterminacy.73 Rules’ tendency of under- or over-inclusiveness stems
68
Emma Gibson et al., ‘Effectiveness of Regulation: Literature Review and Analysis’
(2008) 9 available at http://publications.environmentagency.gov.uk; Frank Partnoy,
‘Financial systems, crises, and regulation’ in Niamh Moloney, Eilís Ferran, and Jennifer
Payne (eds), The Oxford Handbook of Financial Regulation (Oxford University Press, 2015)
where the author said “[t]he complexity of modern markets has led to the proliferation of
ex-ante rules, which purport to provide greater certainty to regulators and market partici-
pants. In some cases, that certainty is important and welcome. In other cases, it has deleteri-
ous consequences. The proliferation of rules raises numerous policy questions, including
whether financial markets might be better served by greater regulatory uncertainty.”
69
Karen Yeung, Securing compliance: A principled approach (Bloomsbury Publishing,
2004) 30–36.
70
For example, Kenneth Culp Davis, ‘Discretionary justice’ (1970) 23.1 Journal of Legal
Education 56; William West, ‘Administrative rule-making: An old and emerging literature’
(2005) 65.6 Public Administration Review 655, 655; Paul Craig, Administrative Law
(Sweet & Maxwell, 8th edition, 2016) Ch I.
71
Kenneth Culp Davis, Discretionary justice: A preliminary inquiry (LSU Press, 1969) 219.
72
Robert Baldwin, Rules and government (Clarendon Press, 1995) 13.
73
Robert Baldwin, Rules and government; Julia Black, Rules and regulators (Clarendon
Press Oxford, 1997); Frederick Schauer, Playing by the Rules: A Philosophical Examination of
Rule-based Decision-making in Law and in Life (Clarendon Press, 1991).
18 J. KIM
from the nature of rules, and rules’ indeterminacy comes from the nature
of the language which describes rules.74
Inclusiveness
Inclusiveness is about how completely a rule includes all characteristics of
the regulated actions relevant to the policy goal. Rule-making must go
through a process of generalization where the characteristics of regulated
actions are categorized; then, the characteristics which have cause-effect
relationships with the relevant policy goal are filtered out.75 However,
assessing the cause-effect relationship involves anticipating future events
which can result from the characteristics and this inherently has the pos-
sibility of errors. Realistically, it is impossible to design rules with perfect
inclusiveness.76 If the relevant technology or practice of actions is rapidly
changing, cause-effect estimates are even more difficult. Pistor and Xu
argued that law inherently cannot help but be over- or under-inclusive.77
They explained that because law has to cover a large variety of cases over a
long period of time, it must be generally defined and cannot be designed
to address every event; thus, law is highly likely to be over-inclusive. But if
detailed action types are specified in law in order to reduce over-
inclusiveness, they argued, the law can be under-inclusive because law-
makers cannot accurately foresee all future events.
Ehrlich and Posner commented that over- and under-inclusive rules are
both ineffective.78 Over-inclusive rules hinder socially beneficial actions.
Under-inclusive rules allow actions which should be socially forbidden and
so reduce society’s welfare. Over-inclusive rules, in addition to the direct
loss resulting from the diminishment of beneficial actions, trigger uncoop-
erative attitude among the regulatees.79
74
Robert Baldwin, Rules and government, 6.
75
Julia Black, Rules and regulators (Clarendon Press Oxford, 1997) 7.
76
Frederick Schauer, Playing by the Rules: A Philosophical Examination of Rule-based
Decision-making in Law and in Life (Clarendon Press, 1991) 35.
77
Katharina Pistor and Chenggang Xu, ‘Incomplete law’ (2002) 35 NYUJ Int’l L. & Pol,
932, 941–944 where he used different terminology of Type I (over-inclusive rules) and Type
II (under-inclusive rules); Christopher Hood, The Government of Risk: Understanding Risk
Regulation Regimes (OUP Oxford, 2001) 181.
78
Isaac Ehrlich and Richard A. Posner, ‘An economic analysis of legal rule-making’ (1974)
3.1 The Journal of Legal Studies 257.
79
Eugene Bardach and Robert Allen Kagan, Going by the book: The problem of regulatory
unreasonableness; Julia Black, Rules and regulators (Clarendon Press Oxford, 1997) 9.
Indeterminacy
Another inherent limitation of rules is indeterminacy.80 Indeterminacy first
arises because of the ‘nature of language’. Hart explained that, when inter-
preting meaning, the general language which constitutes rules is divided
into two parts: ‘a core of certainty’ and ‘a penumbra of doubt’.81 Hart
gave the example of the ‘vehicle’: it is clear that the motor car is included
in the idea of a vehicle (‘a core of certainty’) but it is unclear whether roller
skates are included (‘a penumbra of doubt’). He explained that ‘there is a
limit, inherent in the nature of language, to the guidance which general
language can provide’.82 As such, the ‘penumbra of doubt’ must be clari-
fied through interpretations in each case.83
Black suggested that interpretation of rules has limitations as well. The
meaning of the general language used in rules can vary depending on the
community using them.84 A word that has a particular meaning in one
community can have a different meaning in another. The interpretation of
general language in a rule can vary depending on what is agreed by the
community.85 Thus, the meaning of a rule doesn’t have one accurate inter-
pretation. It can be said that the certainty of a rule relies not only on the
characteristics of the rule itself but also on how much the constituents in
the regulatory space have a common understanding of the rule.
Regulation by Rules or by Discretion

Regulating by rules seeks to build processes in administrative actions in
order to protect individuals’ procedural rights.86 However, the justice pur-
sued only by rules tends to focus on procedural fairness instead of substan-
tive results.87 Because of the rules’ limitations discussed above, it is
impossible for rules to perfectly define the policy goal ex-ante.
80
81
Herbert Lionel Adolphus Hart et al., The concept of law (Oxford University Press,
2012) 123.
82
Ibid., 125.
83
Ibid., 124–128.
84
85
Stanley Fish, Doing What Comes Naturally: Change, Rhetoric, and the Practice of Theory
in Literary & Legal Studies (Duke University Press, 1989) location 1719 (kindle edition).
86
87
Nicola Lacey, ‘The jurisprudence of discretion: escaping the legal paradigm’ in Keith
Hawkins, The uses of discretion (Clarendon Press, 2002) 369.
20 J. KIM
On top of this, it isn’t even clear that rules can control abusive discre-
tion by officials.88 Because regulatory officials are the experts in regulatory
processes, they can find many ways to justify their actions or non-actions.
Thus, the attempt to limit an official’s discretion by increasing the number
of rules and making the rules more detailed may not achieve the intended
effect. Rather, some commentators empirically showed that internalized
social obligations are more effective in acting as constraints to officials’
decision-making.89
Regulation only relying on rules sees administrative decision-making as
applying a mechanical formula, ‘if A (a situation when regulatory inter-
vention is needed), then B (a regulatory intervention)’.90 However, defin-
ing situations where regulatory intervention is needed, or in other words
the ‘A’ in the formula, isn’t something that can be done mechanically in
the real world. Not only legal perspectives but also political perspectives
impact the process of fact-finding. The IRHP scandal, where the UK par-
liament directly got involved in the regulator’s investigation process is a
good example.91 In addition, even if the ‘A’ in the formula is defined, it
cannot be said with certainty that the administrative action of ‘B’ will fol-
low, because of selective enforcement.92
The slow responsiveness of rules is another problem. The world
changes; thus, public and social demands also change. When rules cannot
follow the speed of such changes, they act as a hindrance to adaptive regu-
latory decision-making.93
But then, regulation heavily relying on discretion is also far from per-
fection. In a democratic political system, the ‘rule of law’ is one of the
means of ensuring that the government is ‘responsive’ to the people.94
88
89
Daniel J. Gifford, ‘Decisions, Decisional Referents, and Administrative Justice’ (1972)
37 Law & Contemp. Probs. 3, 5; Herbert Lionel Adolphus Hart et al., The concept of law
(Oxford University Press, 2012) 141–142; Ronald M. Dworkin, ‘The model of rules’ (1967)
35.1 The University of Chicago Law Review 14, 32–40.
90
Isaac Ehrlich and Richard A. Posner, ‘An economic analysis of legal rule-making’, 258;
Daniel J. Gifford, ‘Decisions, Decisional Referents, and Administrative Justice’, 25–26.
91
See p. 29.
92
Donghua Chen, et al., ‘Selective enforcement of regulation’ (2011) 4.1 China Journal
of Accounting Research 9.
93
David L Shapiro, ‘The choice of rule-making or adjudication in the development of
administrative policy’ (1965) Harvard Law Review 921.
94
Antonin Scalia, ‘The rule of law as a law of rules’ (1989) 56.4 The University of Chicago
Law Review 1175, 1176; Eric A Posner and Adrian Vermeule, ‘Inside or Outside the
System?’ (2013) University of Chicago Law Review, 1743, 1776–1778.
Rules with insufficient clarity and precision can be criticized as being

undemocratic because the rights of the people are restricted by govern-
ment officials who are not the representatives of the people.95 There is the
risk that discretion can unfairly intrude on individual rights at any time.
Thus, Davis argued that discretion is a cause of government failures and
that the scope and manner of usage of discretion should be clearly defined
and limited through the usage of rules.96
In summary, this section defines effectiveness of regulation as balancing
between stability and rationality and argues that a regulatory regime can-
not reach the balancing point by rules or by discretion alone. The follow-
ing sub-sections provide the theoretical framework for evaluating
effectiveness of COB regimes of the two countries. First the approaches
and strategies of rule-making and rule-enforcing are examined (theories to
‘identify differences’) and then effective rule-making and rule-enforcing is
defined; and the jurisdiction’s diverging strategies in COB is explained
(theories to ‘explain differences’); finally, the method of evaluating the
effectiveness of COB is discussed (theories to ‘evaluate’).
1.2.2.1 Different Approaches to Rule-Making and Its Effectiveness

Rules can be classified into different types, and there are different
approaches to formulating them. Each type has different effects on stabil-
ity and rationality.
In classifying the types of rules, there can be various dimensions; here,
coerciveness and precision will be used because they are closely related
with this study.97 Classifying a rule by coerciveness involves examining the
effect when there is a contravention of the rule,98 and based on this crite-
rion, rules can be divided into mandatory rules and recommendatory
ones. When there is a contravention of mandatory rules, there can be
95
Antonin Scalia, ‘The rule of law as a law of rules’, 1176.
96
Kenneth Culp Davis, Discretionary justice: A preliminary inquiry 142; Kenneth Culp
Davis, ‘Discretionary justice’ (1970) 23.1 Journal of Legal Education 56, 58–61, where the
author explained that ‘open rules’ were the best method to prevent ‘arbitrariness’ and ‘injus-
tice’. The ‘openness’ he argued for refers to the predictability and certainty of anyone being
able to foresee the results.
97
Julia Black, Rules and regulators (Clarendon Press Oxford, 1997) 20–24.
98
Margit Cohn, ‘Law and Regulation: The Role, Form and Choice of Legal Rules’ in
David Levi-Faur, Handbook on the Politics of Regulation (Edward Elgar Publishing, 2011)
185–190.
22 J. KIM
regulatory sanctions, but when there is a contravention of recommenda-

tory rules, there is no direct legal effect. Recommendatory rules’ function
is to provide information on the regulation to improve compliance with
mandatory rules. As mandatory rules provide the regulator and the regu-
latee with clear standards as well as clear consequences of a contravention,
they strengthen the stability of the regulatory system. On the other hand,
recommendatory rules improve the rationality of the regulatory system
because the regulator uses discretion in deciding whether a contravention
of the rule is inhibiting the achievement of the regulatory goal.
Classification by the level of precision of rules involves the extent of
inclusiveness of rules.99 There are various methods to turn a policy goal
into rules from the precision criterion. The level of precision can be evalu-
ated based on their literalness.100 Precise rules have certainty in terms of
their interpretation;101 however, because of their rigidity, what they achieve
can be somewhat distant from their purposes. For example, regarding the
policy goal of preventing ‘mis-selling’, if a rule specifies each item that
financial institutions must explain about a financial instrument, such as
price, maturity and risk, anyone can decide with certainty whether there is
a rule contravention. But if another information which isn’t currently
specified in the rule such as early exit fees becomes important for a finan-
cial instrument, then the rule becomes under-inclusive.
Less precise but more purposive rules provide flexibility for interpreta-
tion in a way which fits their purpose. Such flexibility enables the regula-
tees to have confidence that the application of rules is reasonable, thereby
enhancing the cooperation between the regulator and the regulatee.
However, the flexible interpretation may damage stability.102 For example,
if a rule requires financial institution to explain all material information
about financial instruments, there can be flexibility in its application, and
this approach is better aligned to the policy goal of preventing ‘mis-
selling’. However, the uncertainty of application increases because the
meaning of ‘material information’ can vary from person to person.
99
Colin S. Diver, ‘The optimal precision of administrative rules’ (1983) 93.1 The Yale Law
Journal 65, 66–68.
100
Anthony I. Ogus, Regulation: Legal Form and Economic Theory (Hart Publishing,
2004) n81 (Ch 8).
101
John Armour, Principles of Financial Regulation, location 18083 (kindle edition).
102
Eilis Ferran, ‘Capital Market Competitiveness and Enforcement’ (2008) 8, available at
SSRN: https://ssrn.com/abstract=1127245, accessed 16th January 2017.
Effectiveness of Rule-Making
Precise and mandatory rules can improve the certainty of their interpreta-
tion and application, but the rationality can be decreased in circumstances
that were not foreseen at the time of rule-making. On the other hand,
vague rules which directly express regulatory goals can be applied in accor-
dance with their purposes; however, there is the greater possibility that
consistency and certainty in rule-application will be deteriorated because
of the reliance on discretion of rule-enforcers. The trade-off relationship
between stability and rationality in rule-making has the implication that
rule-making must strike a balance.103
The balancing point between the two values will vary depending on the
characteristic of the regulated area and the attitude and culture of the
regulatees. According to Pistor and Xu, vague rules are appropriate ‘in the
area where institutional/technological change is comparatively slow and
where the expected harm from actions that are not deterred can be con-
tained’ but ‘when actions may result in substantial harm that may not be
easily reversed’, vague rules may result in substantial loss in social wel-
fare.104 In determining which rule-types are appropriate for the COB
requires an empirical approach based on an analysis of each rule-type’s
causality to regulatory outcomes.
In terms of rule-making, the regulatory costs (deterioration of certainty
or deterioration of reasonableness) will vary depending on the type of rule
due to the trade-off relationship between stability and rationality.105
Therefore, effectiveness of rule-making depends on how to successfully
balance stability and rationality by using different types of rules.
1.2.2.2 Different Approaches to Rule-Enforcing and Its Effectiveness

Different approaches in enforcement, even with the same standards, may
create entirely different outcomes.106 Reiss classified public enforcement
103
Isaac Ehrlich and Richard A. Posner, ‘An economic analysis of legal rule-making’; Colin
S Diver, ‘The optimal precision of administrative rules’; Robert Baldwin, Rules and
government.
104
Katharina Pistor and Chenggang Xu, ‘Law enforcement under incomplete law: Theory
and evidence from financial market regulation’ [2002] 5–6 available at http://eprints.lse.
ac.uk/3748/1/Law_Enforcement_under_Incomplete_Law_Theory_and_Evidence_from_
Financial_Market_Regulation.pdf, accessed 12th April 2017.
105
See p. 16.
106
John C. Coffee, ‘Law and the market: The impact of enforcement’ 156.2 (2007)
University of Pennsylvania Law Review 229, 284–292.
24 J. KIM
strategies largely into two types.107 One is compliance-focused enforce-

ment, where regulatory resources are mostly put into compliance-
supportive actions. Under this strategy, ex-post sanction on a breach is
only used as the last resort, while the educative and informative activities
for preventing the breach are the main tasks.
The other approach is deterrence-focused enforcement, where sanc-
tions against regulatory breaches are used to prevent further breach by the
wrongdoer and other potential wrongdoers. Much of the regulatory
resource is put into the detection and sanctioning of breach. Under this
approach, the relationship between the enforcer and the regulated is simi-
lar to that of the police and criminals.108
Enforcement and compliance are two sides of one coin. The regulatee
selects a compliance strategy in response to the regulator’s enforcement
approach.109 And the causes of compliance or non-compliance are closely
connected to the regulatee’s motivation for compliance.
Kagan et al. explained that the regulatees are motivated to comply with
regulation by fear (legal license) or duty (normative license) and that com-
pliance can be constrained by economic forces (economic license), which
oblige the regulatees to meet the financial demands of shareholders or
creditors.110 In some situations, regulatory compliance may mean sacrific-
ing profit and bonus and so can be to the disadvantage of the financial
107
Albert J. Reiss, ‘Selecting Strategies of Social Control over Organizational Life’ in Keith
Hawkins and John M. Thomas, Enforcing regulation (Springer-Science+Business Media,
B.V., 1984) 27–30; John Braithwaite, John Walker and Peter Grabosky, ‘An Enforcement
Taxonomy of Regulatory Agencies’ (1987) 9.3 LAW & POLICY, 323, 344 where the
authors, who were suspicious of the simple categorization of various enforcement styles into
largely two types and conducted empirical study based on almost 100 regulatory agencies in
Australia, also confirmed that “[t]he world, after all, is perhaps not all that much more com-
plicated than suggested by those who would divide regulation into deterrence versus
compliance…”.
108
John Braithwaite, Restorative justice & responsive regulation (Oxford University Press,
2002) 36–41; Christopher Hodge, Law and Corporate Behaviour: Integrating Theories of
Regulation, Enforcement, Compliance and Ethics (Hart Publishing, 2015) location 15813
(kindle edition).
109
Iain Macneil, ‘Enforcement and Sanctioning’ in Niamh Moloney, Eilís Ferran, and
Jennifer Payne (eds), The Oxford Handbook of Financial Regulation (Oxford University
Press, 2015).
110
Robert A. Kagan, Neil Gunningham, and Dorothy Thornton, ‘Explaining corporate
environmental performance: how does regulation matter?’ [2003] 37.1 Law & Society
Review 51; Robert A. Kagan, Neil Gunningham, and Dorothy Thornton, ‘Fear, duty, and
regulatory compliance: lessons from three research projects’ in Christine Parker and Vibeke
institution and its employees.111 This means that compliance by the

regulatee with potentially costly regulation requires the compulsory power
of legal authority or normative duty.
Kagan and Scholz categorized the regulatee into three types based on
motivation of compliance: amoral calculators, citizens, and incompe-
tents.112 An ‘amoral calculator’ is a regulatee who will breach regulation if
the expected legal penalties don’t extend beyond the profit earned from
the breach.113 They can be considered as ill-intended but well-informed
regulatees who are incentivized to comply by legal license.114 A ‘citizen’ is
a regulatee who is inherently disposed to obey regulation unless it causes
unreasonable cost or outcomes.115 They can be considered as well-intended
and well-informed, and motivated to comply mainly by normative license.
An ‘incompetent’ is an ill-informed regulatee who doesn’t understand the
regulatory requirements.
As an example, a long and descriptive warning of investment risk writ-
ten in fine letters printed on hundreds of pages can be an example of
compliance by ‘amoral calculators’. Strictly speaking, this defensive behav-
iour of financial institutions can be said to comply with rules requiring
explanation of all material risks, but the risk warned in that way cannot be
expected to be recognized by the investors and so doesn’t achieve the
regulatory objective.116
Effectiveness of Rule-Enforcing
Deterrence-oriented enforcement tends to enhance the stability of a regu-
latory regime. Because this approach focuses on detecting breaches of
rules and penalizing the wrongdoers, it should clarify whether behaviour
is compliant or non-compliant and is penalized or non-penalized. This
approach sees the regulatee’s behaviour only as ‘black’ or ‘white’. This can
Lehmann Nielsen, Explaining Compliance: Business Responses to Regulation (Edward Elgar

Publishing, 2011) 37–49.
111
Richard Macrory, ‘Reforming Regulatory Sanctions-Designing a Systemic Approach’ in
Dawn Oliver, Tony Prosser, and Richard Rawlings (eds), The regulatory state: constitutional
implications (Oxford University Press, 2010) 231.
112
Robert A. Kagan and John T Scholz, ‘The Criminology of The Corporations’ in Keith
Hawkins and John M. Thomas, Enforcing regulation (Springer-Science+Business Media,
B.V., 1984).
113
Ibid.
114
Robert Baldwin, Rules and government.
115
Robert A. Kagan and John T Scholz, ‘The Criminology of The Corporations’, 75.
116
See p. 124.
26 J. KIM
damage rationality in some situations. For example, deterrence-oriented

enforcement can penalize a well-intended citizen’s minor breach which
doesn’t threaten the regulatory objective, which results in uncooperative
and antagonistic attitude toward regulation.
On the other hand, compliance-oriented enforcement enhances ratio-
nality. Under this approach, the line between compliance and non-
compliance is blurry, and the goal of enforcement is to facilitate the
regulatee to reach the regulatory objectives. Thus, the enforcer has the
discretion to choose one of various enforcement options, from persuasion
to adversarial sanctions, based on consideration about the circumstances
and intentions of the regulatee. However, this can damage stability.
Each enforcement approach has advantages and disadvantages. Thus,
the effectiveness of public enforcement is defined as balancing between
compliance- and deterrence-oriented enforcement based on the regulated
community’s motivation to comply with regulation.
1.2.2.3 A dvantages and Disadvantages of Private Enforcement

and Its Effectiveness
Private enforcement through litigation is another important enforcement
institution of COB for two main reasons. First, the COB is public law but
deals with contractual relationships, which are the remit of private law. So
there is an overlap between COB and private law. A ‘mis-selling’ case can
be brought simultaneously to the regulator and the court. Therefore, as
private law and COB oversees the same behaviours, there can be legal
uncertainty as well as counter-effectiveness if the relationship of the two
enforcement institutions isn’t designed well. Second, public enforcement
of COB has many limitations to achieve the intended regulatory out-
come alone.
This section examines the advantages and disadvantages of private
enforcement and public enforcement. For a thorough comparison of the
strengths and weaknesses of the two institutions, monitoring and inter-
vention, the two sub-processes of enforcement, are examined below.117
117
Christopher Hood, Tools of Government (Macmillan, 1983) 3–4; Hugh Collins,
REGULATING CONTRACTS (Oxford, 1999) 62; Fabrizio Cafaggi, A coordinated
approach to regulation and civil liability in European Law: Rethinking institutional comple-
mentarities (European University Institute, 2005) 205–235; for general analysis of strength
and weakness of regulation and private law, see Anrei Shleifer ‘The Enforcement Theory of
Regulation’ in Anrei Shleifer (ed), The Failure of Judges and The Rise of Regulators (MIT
Press, 2012) 11–18.
Monitoring
Monitoring is the activity of detecting non-compliance with standards.118
Inspection and audit by regulators comprise typical monitoring
techniques.119
Monitoring isn’t only limited to detecting misbehaviours from which a
detriment has already occurred but could also include detection of misbe-
haviours that could potentially result in detriments. For instance, regula-
tors sanction financial institutions for internal control failures where there
is not detriment to consumers.120 Pre-emptive monitoring is a valuable
role performed by regulators, since it can correct misbehaviours before
detriments occur. In particular, the loss of public confidence in the finan-
cial services industry due to continuous occurrence of scandals renders
proactive monitoring and actions critical.121 Such a proactive approach is
possible due to the independent ability of the regulator to monitor, inves-
tigate, and sanction without an action being raised by a victim.122
However, there is a risk of regulatory monitoring being focused on
areas where the regulator is incentivized to monitor by its own internal or
political agenda.123 And selective monitoring could be exacerbated by the
regulator’s limited resources.124 Hence, socially desirable monitoring can-
not be conducted if the area that requires monitoring doesn’t align with
the regulator’s agenda. The Financial Services Authority acknowledged
this when it confessed that a socially optimal level of regulatory monitor-
ing and intervention was not conducted before the global crisis, because
of its ‘light touch’ agenda.125
118
Peter Cane, ‘Tort law as regulation’ (2002) 31 Comm. L. World Rev. 304, 315.
119
Monitoring can be conducted through alternative dispute resolution bodies, such as the
UK’s Financial Ombudsman Service.
120
For example, see p. 126.
121
See p. 138.
122
Katharina Pistor and Chenggang Xu, ‘Incomplete law’, 935.
123
Matthew C. Stephenson, ‘Public Regulation of Private Enforcement: The Case for
Expanding the Role of Administrative Agencies’ (2005) Virginia Law Review 93, 119.
124
Maria J. Glover, ‘Structural Role of Private Enforcement Mechanism in Public Law’
(2011) 53 Wm. & Mary L. Rev. 1137, 1148.
125
Financial Services Authority, ‘A regulatory response to the global banking crisis’
(Consultation Paper SP09/2, 2009) para 1.63–1.68; Alaistar Hudson, The Law of Finance
(2nd edition, Sweet & Maxwell, 2013) Para 7–63; Simson Gleeson, ‘Culture, Supervision
and Enforcement in Bank Regulation’ in Patrick S. Kenadjian and Andreas Dombret, Getting
the culture and Ethics Right (De Gruyter, 2016) location 1362 (kindle edition).
28 J. KIM
In private enforcement, monitoring isn’t conducted by the agency (the

court), but by those affected by the breach of law. The court’s remedy
incentivizes them to monitor breaches and bring the breach to the court.
This aspect provides private enforcement with an informational advantage
in two ways. First, the person affected by the breach is better positioned
than the regulator to detect contraventions because she is directly affected
by the wrongdoing. While it is impossible for the regulator to monitor and
assess the legitimacy of numerous financial transactions, it can be said that
private enforcement has almost unlimited resources for monitoring.126
Second, the absence of a central agency’s involvement leaves no room for
selective monitoring by the agency.127
However, the cost of litigation could present an obstacle for the harmed
party that brings the breach to the court, thus hindering effective moni-
toring.128 Further, monitoring in private enforcement is only retrospec-
tive, implying that contravention of the law can only be detected after the
harm has been inflicted.
As mentioned previously, there is complementarity in monitoring
between the two institutions. The limitations of private enforcement’s
monitoring, namely its retrospective nature and burdensome costs, can be
supplemented by the ex-ante and proactive monitoring of public enforce-
ment. On the other hand, inadequate monitoring by the regulator due to
selective monitoring and insufficient resources can be improved by the
wider scope of individual monitoring in private enforcement.129
Intervention
Intervention encompasses not only a range of actions in the face of non-
compliance with standards, but also supportive actions that assist the regu-
latee to comply. The regulator has various coercive tools for enforcement:
public censure, financial penalties, suspending permission, or cancelling of
permission. Proactivity is the clearest advantage of public enforcement.
126
Allen M Linden, ‘Tort Law as Ombudsman’ (1973) 51 Canadian Bar Review, 155.
127
Peter Cane, ‘Tort law as regulation’ (2002) 31 Comm. L. World Rev. 304, 317.
128
THIRUVALLORE T. ARVIND and JOANNA GRAY, ‘The Limits of Technocracy:
Private Law’s Future in the Regulatory State’, in Kit Barker, Karen Fairweather and Ross
Grantham, Private Law in the 21st Century (Bloomsbury, 2017) 13.
129
JAMES M. LANDIS, ‘THE ADMINISTRATIVE PROCESS’ (1938) 95.
There is no reliance on requests for enforcement from those directly

affected by a regulatory breach or from other third parties. Launching an
investigation and initiating intervention is done at the regulator’s discre-
tion.130 In deciding whether to enforce or intervene, the regulator will
weigh the cost and benefit of the action.131 This is enabled by the regula-
tor’s sufficient expertise to understand the impact of enforcement or non-
enforcement on the market.
The key disadvantage of public enforcement is the regulator’s potential
vulnerability to external influences, which can originate from the political
parties, other interest groups and even the entities being regulated. The
regulated entities can persuade the regulator consciously or unconsciously
to under-enforce.132 Politicians may put pressure on the regulator to
achieve their preferable outcome on politically important issues. As the
regulator is answerable to parliament, it cannot be free from the pressures
of political parties. The UK’s IRHP scandal serves as an example, where
the parliament’s and an interest group’s pressure influenced the regulator.133
In private enforcement, the court orders wrongdoers to compensate
their victims; this functions as the tool of intervention.134 The biggest
advantage of private enforcement is the better insulation of the court’s
decision from the influence of political parties and interest groups.135 This
advantage is substantial since actions against standard violators tend to
involve political risks; enforcers without the capability or willingness to
130
Joseph A. Grundfest, ‘Disimplying Private Rights of Action Under the Federal Securities
Laws: The Commission’s Authority’ (1994) 107 Harv. L. Rev. 961, 970.
131
Andrei Shleifer, ‘Understanding regulation’ (2005) 11.4 European Financial
Management 439, 446.
132
George J. Stigler, ‘The Theory of Economic Regulation’ (1971) The Bell journal of
economics and management science 3, 10–13.
133
See p. 250.
134
Peter Cane, ‘Tort law as regulation’ (2002) 31 Comm. L. World Rev. 304, 317; Steven
D. Shermer, ‘Efficiency of Private Participation in Regulating and Enforcing the Federal
Pollution Control Laws: A Model for Citizen Involvement’ (1999) 14 J. Envtl. L. & Litig.
461, 477.
135
Richard A. Posner, Economic Analysis of Law (6th edition, Aspen Law and Business,
1998) 385; Andrei Shleifer, ‘Understanding regulation’ (2005) 11.4 European Financial
Management 439, 444.
30 J. KIM
bear the risks cannot take action.136 Landes and Posner explained that the
many tools available to put pressure on the judiciary—such as ‘budget
harassment’, ‘tinkering with the court’s jurisdiction’, and ‘altering the
composition of the judiciary’—cannot be used frequently since it could
damage the perceived independence of the judiciary, resulting in costs to
the beneficiaries of legislation.137 In addition, the sharply contrasting
interests between the plaintiff and the defendant138 don’t leave room for
intrusion by a third party in the court’s decision process.139 The court’s
judgment in the South Korean KIKO disputes stated that there was no
breach in the duty to protect customers in most of the cases despite the
amiable opinion of the political community towards SMEs. This serves as
a good example of the court’s comparative advantage in being insulated
from external influence.140
However, private enforcement has its disadvantages. First, access to pri-
vate law is restricted. In addition to legal expenses, the burden of proving
that there was a violation of law, and a causal relationship between the
violation and detriment, presents a further obstacle to the accessibility of
private law.141 This burden is illustrated in the fact that only one consumer
could secure a compensation order out of eighteen cases of over-the-
counter derivatives ‘mis-selling’ disputes in the UK.142
In the context of COB, the advantage as well as disadvantage of public
enforcement is that the regulator is designed to speedily resolve large ‘mis-
selling’ cases through standardization.143 As consumer characteristics and
circumstances of each alleged ‘mis-selling’ case vary, an in-depth analysis
136
Ana Carvajal, and Jennifer E. Elliott, ‘The Challenge of Enforcement in Securities
Markets: Mission Impossible?’ (2009) 25 available at https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1457591, accessed 13th March 2017.
137
William M. Landes and Richard A. Posner, ‘The Independent Judiciary in an Interest-
Group Perspective’ (1975) 18 J. Law & Econ. 875, 885.
138
Ernest J. Weinrib, The idea of private law (OUP Oxford, 2012) 76.
139
Andrew Robertson, ‘Constraints on Policy-Based Reasoning in Private Law in
Robertson’ in Andrew, and Hang Wu Tang (eds), The goals of private law (Bloomsbury
Publishing, 2009) 272.
140
See p. 29.
141
Hugh Collins, REGULATING CONTRACTS (Oxford, 1999) 89; Federico Della
Negra, ‘The private enforcement of the MiFID conduct of business rules. An overview of the
Italian and Spanish experiences’ (2014) European Review of Contract Law 10.4, 571, 580.
142
See Sect. 4.2.1.6.
143
For example, see the process of regulatory redress for ‘mis-selling’ IRHPs at p. 272;
Hans-W Micklitz, ‘Administrative Enforcement of European Private Law’ in Roger
Brownsword et al., The Foundations of Europeans Private Law (Hart Publishing, 2011) 564.
Another random document with
no related content on Scribd:
Fig. 128.—Terra-cotta statuette.
Actual size. British Museum.
Drawn by Saint-Elme Gautier.
It may be thought, perhaps with truth, that the sculptor has
overdone these details, and that his figures are, in some degree,
sacrificed to the decorations about them. Other examples from the
same series, give a higher idea of the sculpture of this time; we may
cite especially a fragment possessed by the Louvre, in which the
treatment is of the skilfullest (Plate X). It represents Assurbanipal in
his war-chariot at the head of his army. The chariot itself, and all the
accessories, such as the umbrella and the robes of the king and his
attendants, are treated with great care but they do not unduly attract
the eye of the spectator. We can enjoy, as a whole, the group formed
by the figures in the chariot, and those who march beside and
behind it. Its arrangement is clear and well balanced; there is no
crowding, the spacing of the figures is well judged and the
movement natural and suggestive. The king dominates the
composition as he should, and his umbrella happily gathers the lines
of the whole into a pyramid. In all this there is both knowledge and
taste.
The best of the Assyrian terra-cottas also belong to this period.
The merit of their execution may be gathered from the annexed
statuette, which comes from the palace of Assurbanipal (Fig. 128).
From the staff in its hands it has been supposed to represent a king,
but we know that every Assyrian was in the habit of carrying a stick
with a more or less richly ornamented head, and here we find neither
a tiara nor the kind of necklace which the sovereign generally wore
(see Fig. 116). I am inclined to think it is the image of a priest.
In conclusion we may say that, in some respects, Assyrian
sculpture was in a state of progression when the fall of Nineveh
came to arrest its development and to destroy the hopes it inspired.
§ 7.—Polychromy.
We have now studied Mesopotamian sculpture in its favourite

themes, in its principal conventions, and in the fluctuations of its
taste and methods of work; we have yet to ask whether this
sculpture, which differed in so many ways from the plastic art of
Egypt, differed from it also in absence of colour. We have put off this
question until now, because we had first to determine what materials
the architect and sculptor employed, how they employed them, and
what part was played by figures in relief and in the round in the
architectonic creations of Chaldæa and Assyria.
In speaking of Egypt we have explained how a brilliant light
destroys the apparent modelling of objects, how, by the reflections it
casts into the shadows, it interferes with our power to distinguish one
distant plane from another.[273] In every country where a vertical sun
shines in an unclouded sky, the decorator has had to invoke the help
of colour against the violence of the light, has had to accept its aid in
strengthening his contours, and in making his figures and ornaments
stand out against their ground. In describing Egyptian polychromy
we said that we should find the same tendency among other nations,
different in character and origin, but subjected to the influence of
similar surroundings. We also allowed it to be seen that we should
have to notice many changes of fashion in this employment of
colour. Colour played a different and more important part in one
place or period than in another, and it is not always easy to specify
the causes of the difference. In the Egyptian monuments hardly a
square inch of surface can be found over which the painter has not
drawn his brush; elsewhere, in Greece for instance, we shall find him
more discreet, and his artificial tints restricted to certain well-defined
parts of a figure or building.
Did Assyria follow the teaching of Egypt, or did she strike out a
line of her own, and set an example of the reserve that was
afterwards to find favour in Greece? That is the question to be
answered. Before we can do so we must produce and compare the
evidence brought forward by Botta, Layard, Place and others, who
saw the Assyrian sculptures reappear in the light of day. Ever since
those sculptures were recovered they have been exposed to the air;
they have undergone all the handling and rubbing involved in a
voyage to Europe; and for the last twenty or thirty years they have
been subjected to the dampness of our climate. We need, then, feel
no surprise that traces of colour still visible when the pick-axe of the
explorer freed the alabaster slabs from their envelope of earth have
now disappeared.
Before examining our chief witnesses, the men who dug up
Khorsabad, and Nimroud, and Kouyundjik, we may, to some extent,
foretell their answers. We have already explained how the
Mesopotamian architect made use of colour to mask the poverty of
his construction and to furnish the great bare walls of his clay
buildings. Both inside and outside, the Assyrian palaces had the
upper parts of their walls and the archivolts of their doors decorated
with enamelled bricks or paintings in distemper. Is it to be supposed
that where the reliefs began all artificial tinting left off, and that the
eye had nothing but the dull grey of gypsum and limestone to
wander to from the rich dyes of the carpets with which the floors
were strewn? Nothing could well be more disagreeable than such a
contrast. In our own day, and over the whole of the vast continent
that stretches from China to Asia Minor, there is not a stuff, however
humble, that is woven on the loom or embroidered by the needle, but
betrays an instinctive feeling for harmony so true and subtle that
every artist wonders at it, and the most tasteful of our art workmen
despair of reaching its perfection, and yet many of these faultless
harmonies were conceived and realized in the tent of the nomad
shepherd. We can hardly believe that in the palace where official art
lavished all its resources in honour of its master, there could be any
part from which the gaiety that colour gives was entirely excluded,
especially if it was exactly the part to which the eye of every visitor
would be most surely attracted.
Before going into the question of evidence one might, therefore,
make up our minds that the Assyrian architect never allowed any
such element of failure to be introduced into his work; and the
excavations have made that conclusion certain. The Assyrian reliefs
were coloured, but they were not coloured all over like those of
Egypt; the grain of the stone did not disappear, from one end of the
frieze to the other, under a layer of painted stucco. Flandin, the
draughtsman attached to the expedition of M. Botta, alone speaks of
a coat of ochre spread over the bed of the relief and over the nude
portions of the figures;[274] he confesses, however, that the traces
were very slight and that they occurred only on a slab here and
there. Botta, who saw the same slabs, thought his colleague
mistaken.[275] Place is no less decided: “None of us,” he says, “could
find any traces of paint upon the undraped portions of the figures,
and it would be very extraordinary if among so many bare arms and
bare legs, to say nothing of faces, not one should have retained any
vestige of colour if they had all once been painted.”[276] We might be
inclined to ask whether the traces of pigment that have been noticed
here and there upon the alabaster might not have been the remains
of a more widespread coloration, the rest of which had disappeared.
Strong in his experience, Place thus answers any doubts that might
be expressed on this point: “We never found an ornament, a
weapon, a shoe or sandal, partially coloured; they were either
coloured all over or left bare, while objects in close proximity were
without any hue but their own. Sometimes eyes and eyebrows were
painted, while hair and beard were left untouched; sometimes the
tiara with which a figure was crowned or the fan it carried in its hand
was painted while the hand itself and the hair that curled about the
head showed not the slightest trace of such an operation; elsewhere
colour was only to be found on a baldrick, on sandals, or the fringes
of a robe.” Wherever these colours existed at all they were so fresh
and brilliant at the time of discovery that no one thought of explaining
their absence from certain parts of the work by the destruction of the
pigment. “How is it,” continues Place, “that, if robes were painted all
over, we only found colour on certain accessories, on fringes and
embroideries? How is it that if the winged bulls were coated in paint
from head to foot, not one of the deep grooves in their curled beards
and hair has preserved the slightest vestige of colour, while the white
and black of their eyes, which are salient rather than hollowed,
remain intact? Finally, we may mention the following purely
accidental, and therefore all the more significant, fact: a smudge of
black paint, some two feet long, was still clearly visible on the breast
of one of the colossi in the doorway of room 19.[277] How can we
account for the persistence of this smudge, which must have fallen
upon the monster’s breast while they were painting its hair, if we are
to suppose that the whole of its body was covered with a tint which
has disappeared and left no sign?”
Such evidence is decisive. The colouring of the Assyrian reliefs
must always have been partial. The sculptor employed the painter
merely to give a few strokes of the brush which, by the frankness
and vivacity of their accent, should bring the frieze into harmony with
the wall that enframed it. Nothing more was required to destroy the
dull monotony of the long band of stone. At the same time these
touches of colour helped to draw attention to certain details upon
which the sculptor wished to insist.
For all this, four colours were enough. Observers agree in saying
that black, white, red and blue made up the whole palette.[278] These
tints were everywhere employed pretty much in the same fashion.
[279]
In those figures in which drapery covered all but the head, the
latter was, of course, more important than ever. The artist therefore
set himself to work to increase its effect as much as he could. He
painted the eyeball white, the pupil and iris, the eyebrows, the hair
and the beard, black; sometimes the edges of the eyelids were
defined with the same colour. The band about the head of the king or
vizier is often coloured red, as well as the rosettes which in other
figures sometimes decorate the royal tiara. The same tint is used
upon fringes, baldricks, sandals, earrings, parasols and fly-flappers,
sceptres, the harness of horses and the ornamental studs or bosses
with which it was covered, and the points of weapons.[280] In some
instances blue is substituted for red in these details. Place speaks of
a fragment lost in the Tigris on which the colours were more brilliant
than usual; upon it the king held a fan of peacock’s feathers coloured
with the brightest mineral blue.[281]
When figures held a flower in their hands it was blue, and at
Khorsabad a bird on the wing was covered with the same tint.[282] In
some bas-reliefs red and blue alternate in the sandals of the figures
and harness of the horses.[283] We find a red bow with a blue quiver.
[284] The flames of towns taken and set on fire by the Assyrians were
coloured red in many of the Khorsabad reliefs.[285]

A few traces of colour may still be discovered upon some of
Sargon’s sculptures in the Louvre and upon those of Assurnazirpal in
the British Museum.[286] I could find no remains of colour either upon
the reliefs of Assurbanipal or upon those of Sennacherib, where,
moreover, Layard tells us he could discover none.[287]
It would be very strange however, if in these palaces of the last of
the Sargonids the decorator had deliberately renounced the beauties
of that discreet system of polychromy of which the traces are to be
found in all the earlier palaces. It is possible that these touches of
colour were reserved for the last when the palaces were erected,
and that something may have happened to prevent them from being
placed on the sculptures of these two sovereigns.
So far as we can discover, no trace of colour has been found on
any of the arched steles or isolated statues left to us by Chaldæa
and Assyria. This abstention is to be explained by the nature of the
materials at the disposal of the sculptor in Chaldæa, the cradle of his
art. These were chiefly igneous rocks, very hard, very close in grain
and dark in colour, and susceptible of a very high polish. The
existence of such a polish disposes of any idea that the figures to
which it was given were ever painted. The pigment would not have
stayed long on such a surface, and besides, the reds and blues
known to the Ninevite artists would have had a very poor effect on a
blue-black ground.
On the other hand, when they set to work to model in clay the
Assyrians could give free rein to their love for colour. Most of the
statuettes found in the ruins of their palaces had been covered with a
single uniform tint, which, thanks to the porous nature of the
material, is still in fair preservation. The tint varies between one
figure and another, and, as they are mostly figures of gods or
demons, the idea has been suggested that their colours are
emblematic.[288] Thus the Louvre possesses a statuette from
Khorsabad representing a god crowned with a double-horned tiara,
and covered all over, flesh and drapery alike, with an azure blue.[289]
A demon with the head of a carnivorous animal, from the same
place, is painted black, a colour that seems to suggest a malevolent
being walking in the night and dwelling in subterranean regions.[290]
The Assyrians also made use of what has been sometimes called
natural polychromy, that is to say they introduced different materials
into the composition of a single figure, each having a colour of its
own and being used to suggest a similar tint in the object
represented. Several fragments of this kind may be seen in the
cases of the British Museum.[291] We may give as examples some
eyes in black marble; the ball itself is ivory while the pupil and iris are
of blue paste, a sandy frit in which the colour sank deeply before
firing. Beards and hair were also made of this material; they have
been found in several instances, without the heads to which they
belonged. In the ruins from which he took these objects, Layard saw
arms, legs and torsos of wood. They were so completely carbonized
by fire that they could not be removed; at the least touch they
crumbled into powder.
With wood, with enamel and coloured earths, with stones, both
soft and hard, and metals both common, like bronze, and precious,
like gold and silver, the sculptor built up statues and statuettes in
which the peculiar beauty to be attained by the juxtaposition of such
heterogeneous materials, was steadily kept in view. With inferior
taste and less feeling for purity of form than the Greeks, this art was
identical in principal with the chryselephantine sculpture that created
the Olympian Zeus and the Athene of the Parthenon.
The idea that sculpture is the art in which form is treated to the
exclusion of colour is quite a modern one.[292] The sculptor of
Assyria was as ready to mix colour with his contours as his confrère
of Egypt, but he made use of it in more sober and reserved fashion.
How are we to explain the difference? It is easier to prove the fact
than to give a reason for it. It may be said that the sunlight is less
constant and less blinding in Mesopotamia than in the Nile valley,
and that the artist was not called upon to struggle with such
determination, by the profusion and brightness of his colours, against
the devouring illumination that impoverishes outlines and obliterates
modelling. We must also bear in mind the habits formed by work in
such materials as basalt and diorite, which did not lend themselves
kindly to the use of bright colours.
In any case the fact itself seems incontestable. We cannot say of
the Ninevite reliefs as we said of those of Thebes, that they
resembled a brilliant tapestry stretched over the flat wall-surfaces. If,
in most of the buildings, touches of paint freely placed upon the
accessories and even upon the figures and faces, lightened and
varied the general appearance of the sculptures, still the naked
stone was left to show all over the bed and over the greater part of
the figures. From this we must not conclude, however, that the
Assyrians and Chaldæans did not possess, and possess in a very
high degree, the love for bold and brilliant colour-schemes which
even now distinguishes their degenerate posterity, the races
inhabiting the Euphrates valley and the plateau of Iran. But they
gratified their innate and hereditary taste in a different way. It was to
their woven stuffs, to their paintings in distemper and their enamelled
faïence that the buildings of Mesopotamia owed that gaiety of
appearance which has led us to compare them with the mosques of
Turkey and Persia.
§ 8.—Gems.
“Every Babylonian had a seal,” says Herodotus;[293] this fact

seems to have struck him directly he began to explore the streets
and bazaars of the great oriental city. These seals, which appear to
have attracted the eye of the historian by the open manner in which
they were carried and the continual use made of them in every
transaction of life, public or private, are now in our museums. They
are to be found in hundreds in all the galleries and private collections
of Europe.[294]
When Chaldæan civilization became sufficiently advanced for
writing to be in widespread use and for every man to provide himself
with his own personal seal, no great search for convenient materials
was necessary. The rounded pebbles of the river beds gave all that
was wanted. The instinct for personal adornment is one of the
earliest felt by mankind, and just as the children of to-day search in
the shingle of a beach for stones more attractive than the rest, either
by their bright colours, or vivid markings or transparency of paste, so
also did the fathers of civilization. And when they had found such
stones they drilled holes through them and made them into earrings,
necklaces and bracelets. More than one set of pebble ornaments
has been preserved for us in the Chaldæan tombs. In many
instances forms sketched out by the accidents of nature have been
carried to completion by the hand of man (Fig. 129). They were not
long contented with thus turning a pebble into a jewel. The fancy
took them to engrave designs or figures upon them so as to give a
peculiar value to the single stone or to sets strung into a necklace,
which thus became a kind of amulet (Fig. 130).
In the first instance this engraving was nothing more than an
ornament. But one day it occurred to some possessor of such a
stone to take an impression upon plastic clay. Those who saw the
image thus obtained were struck by its precision, and were soon led
to make use of it for authenticating acts and transactions of every
kind. The presence of such an impression upon a document would
perpetuate the memory of the man who put it there, and would be
equivalent to what we call a sign manual.
But even when it developed into a seal the engraved stone did
not lose its talismanic value. In order to preserve its quasi-magic
character, nothing more was required than the presence of a god
among the figures engraved upon it. By carrying upon his person the
image of the deity in which he placed his confidence, the Chaldæan
covered himself with his protection as with a shield, and something
of the same virtue passed into the impressions which the seal could
produce in such infinite numbers.
Fig. 129.—River pebble
which has formed part of a
necklace.
Fig. 130.—River pebble engraved; from De

Gobineau.
No subject occurs more often on the cylinders than the celestial
gods triumphing over demons. Such an image when impressed upon
the soft clay would preserve sealed-up treasures from attempts
inspired by the infernal powers, and would interest the gods in the
maintenance of any contract to which it might be appended.[295]
To all this we must add that superstitions, of which traces subsist
in the East to this day, ascribed magic power to certain stones.
Hematite, for instance, as its name suggests, was supposed to stop
bleeding, while even the Greeks believed that a carnelian gave
courage to any one who wore it on his finger.
When engraving on hard stone was first attempted, it was, then,
less for the love of art than for the profit to be won by the magic
virtues and mysterious affinities, both of the material itself, and of the
image cut in its substance. Then, with the increase of material
comfort, and the development of social relations, came the desire of
every Chaldæan to possess a seal of his own, a signet that should
distinguish him from his contemporaries and be his own peculiar
property, the permanent symbol of his own person and will. So far as
we can tell, none but the lowest classes were without their seals;
these latter when they were parties or witnesses to a contract, were
contented with impressing their fingernails on the soft clay. Such
marks may be found on more than one terra-cotta document; they
answer to the cross with which our own uneducated classes supply
the place of a signature.
When the use of the seal became general, efforts were made to
add to its convenience. In order to get a good impression it was
necessary that the design should be cut on a fairly even and regular
surface. The river pebbles were mostly ovoid in form and could
easily be made cylindrical by friction, and the latter shape at last
became so universal that these little objects are always known as
cylinders. These cylinders were long neglected, but within the last
few years they have been the subject of some curious researches.
[296] They may be studied from two different points of view. We may
either give our attention to the inscriptions cut upon them and to their
general historical significance, or we may endeavour to learn what
they may have to teach as to the religious myths and beliefs of
Chaldæa. As for us we are interested in them chiefly as works of art.
It will be our duty to give some idea of the artistic value of the figures
they bear, and to describe the process by which the engraving was
carried out.
The cylinders are, as a rule, from two to three-fifths of an inch in
diameter, and from three quarters of an inch to an inch and a half in
length. Some are as much as an inch and three quarters, or even
two inches long, but they are quite exceptional.[297] The two ends
are always quite plain—the engraving is confined to the convex
surface. As a rule the latter is parallel to the axis, but in some cases
it is hollowed in such a fashion that the diameter of the cylinder is
greater at the ends than in the middle (Fig. 131).
Nearly every cylinder is pierced lengthwise, a narrow hole going
right through it. Those that have been found without this hole are so
very few in number that we may look upon them as unfinished. In
some cases the hole has been commenced at both ends, but the drill
has stopped short of the centre, which still remains solid.
Fig. 131.—Concave-faced
cylinder; from Soldi.
Fig. 132.—Cylinder with modern

mount; from Rawlinson.
The cylinders were suspended by these holes, but how? In
casting about for an answer to this question, the idea that the
Babylonian attached the greatest importance to the clear
reproduction, in the clay, of every detail of the design engraved upon
his seal, has been taken as a starting point, and a system of
mounting invented for him which would leave nothing to be desired
in that respect (see Fig. 132). It is a reproduction, in small, of a
garden roller; as a restoration, however, it can hardly be justified by
the evidence of the monuments. Examine the terra-cotta tablets on
which these seals were used, and you will see that their ancient
possessors did not, as a rule, attempt to impress the whole of the
scenes cut in them upon the soft clay. It is rare to find an impression
as sharp and complete as that on the tablet from Kouyundjik, which
we borrow from Layard (Fig. 133). In the great majority of cases
signatories were content with using only one side of their seals,
usually the side on which their names were engraved. Sometimes
when they wished to transfer the whole of their cylinder to the clay,
they did so by several partial and successive pressures.[298]
The imperfect stamp with which the Chaldæans were satisfied
could easily be produced without the help of such a complicated
contrivance as that shown in our Fig. 132. Nothing more was
necessary than to lay the cylinder upon the soft clay and press it with
the thumb and fore-finger. The hole through its centre was used not
to receive an armature upon which it might turn, but merely for
suspending it to some part of the dress or person. In most cases it
must have been hung by a simple cord passed round the neck. Now
and then, however, the remains of a metal mount have been found in
place, but this is never shaped like that shown above. It is a bronze
stem solidly attached to the cylinder, and with a ring at its upper
extremity (Fig. 134).[299] Cylinders are also found with a kind of ring
at one end cut in the material itself (Fig. 135).
How were these cylinders carried? They must have been
attached to the person or dress, both for the sake of the protecting
the image with which most of them were engraved, and for
convenience and readiness in use as seals. In Chaldæa the fashion
seems to have been, at one time, to fasten them to the wrist. In
those tombs at Warka and Mugheir that we have described, the
cylinders were found on the floors of the tomb-chambers, close to
the wrist-bones of the skeletons; and the latter had not been moved
since the bodies to which they had belonged were laid in the grave.
[300] This fashion was apparently abandoned by the Assyrians, for in
those reliefs which reproduce the smallest details of dress and
ornament with such elaboration, we can never find any trace of the
seal beside the bracelets. It is probable that it was hung round the
neck and put inside the dress, in front, for greater security. It never
occurs among the emblematic objects of which the necklace that
spreads over the chest outside the robe, is made up. To this day
traders in the East keep their seals in a little bag which they carry in
an inside pocket.
Fig. 133.—Tablet with impression from a
cylinder; from Layard.
Fig. 134.—Cylinder with ancient
bronze mount; from Soldi.
Fig. 135.—Cylinder and

attachment in one; from Soldi.
Fig. 136.—Chaldæan cylinder;
from Ménant.
Fig. 137.—Impression from the same cylinder.

The practical requirements of the Mesopotamians were satisfied
with a hasty impression from their seals, but we must be more
difficult to please. Before we can study the cylinder with any
completeness we must have an impression in which no detail of the
intaglio is omitted; such a proof is to be obtained by a complete turn
of the cylinder upon some very plastic material, such as modelling-
wax, or fine and carefully mixed plaster-of-Paris. The operation
requires considerable skill. When it is well performed it results in a
minute bas-relief, a flat projection, in reverse, of the whole intaglio.
The subject represented and its execution can be much better seen
in a proof like this than on the original object, it is therefore by the
help of such impressions that cylinders are always studied; we make
use of them throughout this work. Our Figs. 136 and 137 give some
idea of the change in appearance between a cylinder and its
impression.
The cutting on the cylinders, or rather on all the engraved stones
of western Asia, is in intaglio. This is the earliest form of engraving
upon pietra-dura in every country; the cameo is always a much later
production; it is only to be found in the last stage of development,
when tools and processes have been carried to perfection. It is much
easier to scratch the stone and then to add with the point some
definition to the figure thus obtained, than to cut away the greater
part of the surface and leave the design in relief. The latter process
would have been especially difficult when the inscriptions borne by
many of the seals came to be dealt with. What long and painful
labour it would have required to thus detach the slender lines of the
cuneiform characters from the ground! And why should any attempt
of the kind be made? As soon as these engraved stones began to be
used as seals, there was every reason why the ancient process
should be retained. The designs and characters impressed upon
deeds and other writings were clearer and more legible in relief than
in intaglio. And it must be remembered that with the exception of
some late bricks on which letters are raised by wooden stamps, the
wedges were always hollowed out. We find but one period in the
history of Chaldæa when, as under the early dynasties of Egypt, her
written characters were chiselled in relief. It is, then, apparent that
the artists of Chaldæa would have done violence to their own
convictions and departed from long established habits, had they
deserted intaglio for work in relief. That they did not do so, even
when their skill was at its highest point, need cause us no surprise.
The Chaldæans naturally began with the softest materials, such
as wood, bone, and the shells picked up on the shores of the
Persian Gulf. Fragments of some large pearl oysters and of the
Tridacna squamosa, on which flowers, leaves, and horses have
been engraved with the point, have been brought from lower
Chaldæa to London (see Fig. 138).[301] Limestone, black, white, and
veined marble, and the steatite of which most of the cylinders are
made, were not much more difficult. These substances may easily
be cut with a sharp flint, or with metal tools either pointed or chisel-
shaped. With a little more effort and patience still harder materials,
such as porphyry and basalt; or the ferruginous marbles—
serpentine, syenite, hematite—could be overcome. The oldest
cylinders of all, those that are attributed to the first Chaldæan
monarchy, are mostly of these stubborn materials; their execution
was easy enough to the men who produced the statues of Gudea.
[302] All that such men required to pass from the carving of life-size
figures to the cutting of gems was good eyesight and smaller tools.
It was only towards the end of this period that more unkindly
stones began to be used, such as jasper and the different kinds of
agate, onyx, chalcedony, rock-crystal, garnets, &c. The employment
of such materials implies that of the characteristic processes of gem-
cutting, whose peculiarity consists in the substitution of friction for
cutting, in the supercession of a pointed or edged tool by a powder
taken from a substance harder, or at least as hard, as the one to be
operated upon. “The modern engraver upon precious stones,” says
M. Soldi, “sets about his work in this fashion. He begins by building
up a wax model of his proposed design upon slate. He then takes
the stone to be engraved, and fixes it in the end of a small wooden
staff. This done he makes use, for the actual engraving, of a kind of
lathe, consisting of a small steel wheel which is set in motion by a
large cast-iron flywheel turned by the foot. To the little wheel are
attached small tools of soft iron, some ending in a rounded button,
others in a cutting edge. The craftsman holds the staff with the stone
in his left hand; he brings it into contact with the instrument in the
lathe, while, from time to time, he drops a mixture of olive oil and
diamond dust upon it with his right hand; with the help of this powder
the instrument grinds out all the required hollows one after the
other.”[303]

Strategies of Financial Regulation: Divergent Approaches in Conduct of Business Regulation of Mis-Selling in The UK and South Korea Junghoon Kim

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Strategies of Financial Regulation: Divergent Approaches in Conduct of Business Regulation of Mis-Selling in The UK and South Korea Junghoon Kim

Uploaded by

Copyright:

Available Formats

Strategies of Financial Regulation:

Divergent Approaches in Conduct of

ISBN 978-981-15-7328-6 ISBN 978-981-15-7329-3 (eBook)

I was involved in settling mis-selling disputes of KIKO, a type of over-the-­

Globally, “what” should be regulated is decided by agenda-setters like

This book conducts empirical study on implementation strategies of

Seoul, Korea (Republic of) Junghoon Kim

I would like to thank Professor Dong-Won Ko of Sungkyunkwan

1 Introduction and Research Framework 1

3 Public Enforcement of COB121

4 Private Enforcement of COB197

5 Lessons and Recommendation289

CESR Committee of European Securities Regulators

PCBS Parliamentary Commission on Banking Standards

Constitutional Court of Korea, 2002. 7. 18, 2000 Hunba 57

Table 3.1 Regulator’s sanction against ‘mis-selling’ of over-the-counter

Introduction and Research Framework

1.1 The Purpose of the Book

© The Author(s) 2020 1

50,000 non-financial firms in many developing and developed countries

also self-inflicted due to the personal sales-based compensation system.

terms of the contractual relationship between sellers and buyers. Regarding

David Levi-Faur, Handbook on the Politics of Regulation (Edward Elgar Publishing,

accountable.17 Thus, Siems advises a comparative research choosing legal

1. Rule-making: The UK formulates its rulebook using various rule-­

and rationality; South Korea, due to constitutional, political, and

significant lack of comparative law research on financial regulation and

1.2 Theoretical Frameworks

1.2.1 Theoretical Frameworks of Comparison

1.2.1.1 Comparative Law and Its Purposes

In this sense, the comparative method is both an empirical and descriptive

1.2.1.2 Methodology of Comparison

comparison are then identified.30 Here, it should be clear as to what com-

Therefore, for the functional method to be applied, the social needs

Finding Better Law

improve the quality of policy decisions by providing alternatives and infor-

1.2.2 Theoretical Framework of Evaluation

The approach to achieving the COB’s objective of providing a proper

Effectiveness of Regulation as a Benchmark for Jurisdictional Comparison

The other regulatory value is rationality.60 Rationality means regulatory

The trade-off relationship between stability and rationality exists in the

Cause of the Trade-Off Relationship

Regulation by Rules or by Discretion

Rules with insufficient clarity and precision can be criticized as being

1.2.2.1 Different Approaches to Rule-Making and Its Effectiveness

regulatory sanctions, but when there is a contravention of recommenda-

1.2.2.2 Different Approaches to Rule-Enforcing and Its Effectiveness

strategies largely into two types.107 One is compliance-focused enforce-

institution and its employees.111 This means that compliance by the

Lehmann Nielsen, Explaining Compliance: Business Responses to Regulation (Edward Elgar

damage rationality in some situations. For example, deterrence-oriented

1.2.2.3 A  dvantages and Disadvantages of Private Enforcement

In private enforcement, monitoring isn’t conducted by the agency (the

There is no reliance on requests for enforcement from those directly

We have now studied Mesopotamian sculpture in its favourite

coloured red in many of the Khorsabad reliefs.[285]

“Every Babylonian had a seal,” says Herodotus;[293] this fact

Fig. 130.—River pebble engraved; from De

Fig. 132.—Cylinder with modern

Fig. 135.—Cylinder and

Fig. 137.—Impression from the same cylinder.

You might also like

I was involved in settling mis-selling disputes of KIKO, a type of over-the-

Seoul, Korea (Republic of) Junghoon Kim

1 Introduction and Research Framework 1

3 Public Enforcement of COB121

4 Private Enforcement of COB197

5 Lessons and Recommendation289

1. Rule-making: The UK formulates its rulebook using various rule-

1.2.1.1 Comparative Law and Its Purposes

1.2.1.2 Methodology of Comparison

1.2.2.1 Different Approaches to Rule-Making and Its Effectiveness

1.2.2.2 Different Approaches to Rule-Enforcing and Its Effectiveness

1.2.2.3 A dvantages and Disadvantages of Private Enforcement