Why (Dis)Trust in Regulation Is Now a Core Business Risk

Business lawyers often treat ‘trust in government’ as a background condition, not a variable in their risk models. In a new paper, ‘Trust in Regulation in a Time of Revolution’, I argue that this is no longer possible: when liberal democratic rule‑of‑law norms are destabilized, the content of regulatory trust, and the political struggle over it, goes to the heart of how firms are governed, financed, and regulated in liberal market economies, with profound implications for the infrastructure on which markets rest.

Regulation matters, and trust in regulation matters. Regulation constitutes markets and, more prosaically, mundane regulatory interactions really constitute the ‘face of the state’ as it is experienced by regulated actors. It is through everyday regulatory encounters—getting a license, dealing with inspectors, applying disclosure rules, navigating enforcement—that both ordinary people and firms decide whether public institutions are honest, competent, and reliable. That experience, accumulated across thousands of interactions, is what makes it rational either to trust regulatory institutions or to view them as arbitrary, captured, or hostile. In spite of valid critiques of potential regulatory capture, cronyism, and ineptitude over the decades, most business law scholars would agree that those problems have not been so serious, in jurisdictions like the United Kingdom or the United States, as to undermine the integrity or workability of the rule of law in those countries.

Those assumptions are under pressure now. Ordinary people’s confidence in public institutions has been declining for decades, and the US now has a President who has capitalized on that distrust in ways that further reinforce it. For business interests, it might seem reasonable to conclude that the prudent way forward would be to play the cronyist game that now seems to be on offer. Cronyist horse-trading, demonstrations of fealty, or clubby in-group protection rackets could seem like viable substitutes for trust, ensuring that your own firm was on the ‘right side’ of a volatile American administration. Yet this would be a serious mistake, both in the short term for individual firms and in the long term for the system as a whole.  

The core claim of this paper is that what matters for a liberal regulatory state—and ultimately for business—is justified trust, not just ‘more trust’ at any cost. Building on Onora O’Neill’s work, I define justified trust in regulation as grounded in demonstrated trustworthiness: in regulators consistently demonstrating honesty, competence, and reliability in their interactions. In securities markets, for example, this is reflected in transparent and intelligible rule‑making, reason‑giving in enforcement, publication of coherent guidance, and the evidence‑based use of discretion. Crucially, these ideas are not free-floating: they are inseparable from liberal rule‑of‑law commitments to general and prospective rules, equality before the law, and a basic conviction that all persons (including firms) are entitled to treatment that is principled rather than partisan. In such a normative environment, market participants can rationally trust regulators not because they belong to the same ‘club’ but because institutions are constrained by law and public justification.

For business law, this kind of justified trust at the regulatory register operates as an underappreciated, invisible, utterly indispensable capital good. Modern regulatory regimes—in financial markets, competition law, consumer protection, environmental regulation, and beyond—rely on baseline levels of mutual trust between regulators and regulated actors to function at all. Responsive enforcement strategies, supervisory dialogue, and the extensive use of internal compliance systems all presuppose that regulators will act predictably and proportionately, and that (within limits; not being utopian) firms will in turn invest in genuine self‑regulation rather than strategic box‑ticking. When that mutual trust is present and grounded in rule‑of‑law norms, it allows regimes to be both more flexible and more effective. Regulators can exercise bounded discretion, adapt standards, and rely on cooperative compliance. Firms can trust what regulators say, even in the high-stakes enforcement context. At the market level, it lowers transaction costs, opens more space for flexibility and innovation, and supports fairer and more competitive markets.

The flipside is that failures of regulatory trustworthiness show up as business costs. When regulators are captured, opaque, or inconsistent, they undermine their own legitimacy and create uncertainty that firms and markets must price in. While it may seem rational in the short term for firms to treat regulatory outcomes as functions of access, pressure, or partisan alignment rather than as applications of public rules, over the long term this is the equivalent of eating the seed corn. More immediately, perceived ‘collaborators’ with illegitimate regimes suffer severe, sometimes irreparable reputational harm (as some American law firms are learning now); and trying to get out of one’s complicity ‘in time’ can be a high risk venture indeed.

What is at stake, at least in the US, is not just under‑investment in regulatory capacity (or its actual, willful destruction), but an explicit rejection of the liberal premises that have historically underwritten regulatory trustworthiness. From a business law perspective, this is not a neutral political development and it is not a manageable, gameable one. It attacks precisely the conditions that make sophisticated legal devices—corporate law and corporate governance, securities markets, complex financing structures—reliably usable at scale. A world in which regulatory decisions turn on allegiance rather than legality is one in which compliance investments buy less security, because enforcement is erratic; contracting and capital‑raising costs rise, as counterparties price in arbitrary state action; and both investor protection and the ability to foster fair and competitive capital markets erode as market integrity mechanisms are undermined.

There are no real substitutes for justified trust in regulation, especially as they affect complex and interconnected systems like global capital markets. Clubby ‘trust’ among insiders, coercive obedience, and other work‑arounds cannot replace a public system in which regulators’ honesty, competence, and reliability are continuously performed and contestable. For business lawyers, this suggests that ‘trust in regulation’ should be treated as a first‑order variable rather than an externality.

The paper concludes by arguing that rebuilding regulatory trustworthiness must be part of any serious post‑rupture agenda for both democracy and markets. This requires naming trustworthiness—alongside financial stability, investor and consumer protection, and market integrity—as a distinct regulatory value, and redesigning institutions and supervisory practices to perform honesty, competence, and reliability in ways that are more convincing to more market participants, including ordinary people. For business lawyers and market regulators, the challenge is to defend and update the rule‑of‑law‑based financial regulatory infrastructure, while also responding to the powerful popular critiques about inequality, exclusion, and voice that have fueled distrust and brought us to this moment.

The full paper can be accessed here.

Cristie Ford is a Professor at the Peter A. Allard School of Law, University of British Columbia.