Regulatory capture
A way for a regulator to address this is to consider specifically the kind of relationship required by the regulator with a regulated party, describe it clearly and inculcate an appropriate approach in the culture of the regulator. In Maritime NZ we have essentially ‘banned’ the use of the word customer to describe those we regulate. viewing the parties being regulated as customers. Extreme examples of this manifest themselves in regulators losing sight of who the real beneficiary of regulation is, and can significantly soften and make ineffective the ways that a regulator responds to breaches of the law and standards by regulated parties.Regulatory capture is a form of bias exhibited by a regulator. The kinds of examples referred to above involve a significant level of bias that may be thought of as being hard wired into the regulatory organisation. There are a range of other things that can also drive bias and underpin regulatory behaviour that favours those being regulated over the delivery of public value - if these issues are not understood and addressed clearly by the regulator. Here are a few of the things that can drive bias, or at least perceptions of bias: Essentially, the SEC was said to be ‘captured’ by the industry it was supposed to be regulating so it wasn’t doing its job properly. The classic definition of regulatory capture comes from a theory associated with George Stigler, a Nobel Laureate economist. Basically, regulatory capture occurs when regulators act in ways that benefit the people they are regulating, not the people who are supposed to benefit from regulation.īig picture examples of this are easy to find (like everything else, on the internet !). For example, it is suggested that in the early 2000s the US Securities and Exchange Commission (SEC) acted in the interests of Wall Street banks and hedge funds, instead of in the interests of the Bank’s and hedge fund’s customers. This allegedly included deciding not to investigate Bernie Madoff who ran a massive ponzi scheme - because of the strong links between the people that ran the SEC and the industry they were tasked with regulating. In this context, I am using the term public value to refer to what the actual purpose of a regulator’s activity is – that is usually to protect those who might other wise suffer harm, loss or damage as a result of the actions of a regulated party. This article talks about something that can undermine a regulators’ focus on delivering public value – regulatory capture and bias. I highlighted some of the challenging dimensions of being a regulator. I said I would provide some practical insights into common regulatory issues.
In my first article in this series ( Regulation - the staff of life) I referred to regulation being a necessary and pervasive part of life.