One underexplored reason why regulators might turn to soft law in financial regulation is the sociological pull of soft law venues. The more traditional reasons why financial regulators turn to soft law have been thoughtfully explored by others: (1) soft law is quicker, cheaper, and more flexible; its non-binding nature appeals to fast-moving regulators who need to try things out; it is what the bureaucrats have the professional capacity to do; and soft law imposes low sovereignty costs.
Some have compared these attributes with those that draw lawmakers to hard law. For example, one argument is that trade regime relies on hard law because states need credible and transparent commitments in that regime because the ever present threat of cheating. (2)
While some political scientists have focused on the sociological pull of soft law venues, the legal literature has understandably paid less attention to the sociological aspects of soft law networks. Many legal scholars interested in the network phenomenon tend to investigate this phenomenon by studying the most salient networks--such as financial networks. (3) These networks have been pretty prolific in terms of generating standards and principles, and thus most attention is paid to these outputs, i.e., the standards or principles. These outputs are compared to what would have been possible under a treaty regime.
For example, we can look at best practices emanating from a trans-governmental network and compare those to what might have been available in a hard law regime. In comparing these outputs, one might rightly focus on the advantage of precise language in the best practices. Observing the technical and complex nature of the soft law product, one might hypothesize that one would need mid-level bureaucrats in a forum where they could act quickly. The uncertainty of the subject matter might suggest that only a non-binding output would be acceptable. So looking just at outputs, one would understandably focus on the traditional explanations of why financial regulators turn to soft law.
But soft law networks do more than produce outputs. They allow for a process, an exchange of ideas, a path to consensus that is ongoing and that is itself transformative. Sungjoon Cho and I have looked at the more theoretical aspects of networks by focusing on this sociological process. (4) We look at the relationship between the members of epistemic communities. We theorized about how they interact, persuade, co-opt, negotiate, marginalize, sympathize, and engage with each other.
This sociological component is present in financial networks and is one of the reasons why finance regulators gravitate toward networks. In these networks the institutional distance between regulators and regulatees is rather narrow, in part because there is an epistemic community. Everyone speaks the same language. It is a complex, professional, and technical language that can be indecipherable to outsiders. The network actors engage in a dynamic with each other using this language. They persuade each other of their view of a problem (sometimes supplying technical assistance if it is needed). They might co-opt each other using their working relationships on various projects. They negotiate with each other and have many opportunities to persuade each other.
I would argue that this network dynamic occurs in other regimes as well. For example, there are networks that operate within the trade regime. Trade networks, like financial networks, form where there are complex, technical, near indecipherable challenges. Epistemic communities coalesce around these challenges. Thus, for example, the problem of related party transfer pricing and customs valuation has created a band of network actors. The OECD, along with the World Customs Organization, has gathered private business groups and public officials together to work out solutions to transfer pricing problems. (5) There is an emerging network within the WTO and the OECD confronting the complex challenges of amassing trade statistics. …