Understanding Regulation - Effective Regulation

These pages examine some of the key issues around the behaviour and effectiveness of regulators.

One key lesson is that regulators should not be afraid of looking dumb and asking 'stupid questions'. Larger organisations often behave unpredictably, illogically and/or unethically. Follow this link to read a longer discussion of this topic. More generally, if something is unclear or doesn't feel right, you might well be close to learning something that the regulated entity doesn't want you to know.

Karl Weick and Kathleen Sutcliffe included the following perceptive advice in their book Managing the Unexpected.

'Perceptions of the unexpected are fleeting. You'll probably know when something unexpected happens. You'll know it because you'll feel surprised, puzzled, agitated, anxious, unsettled, frustrated, or even startled. Aviators call these feelings leemers ... the feeling that something is not quite right, but you can't put your finger on it. Trust those feelings. They are a solid clue that your model of the world is in error.

More important, try to hold onto those feelings and resist the temptation to gloss over what has just happened and treat it as normal. In that brief interval between surprise and successful normalizing lies one of your few opportunities to discover what you don't know.

One unusual example was the FBI's failure to follow up on their agents' reports that some trainee pilots had asked to be shown how to fly a plane, but not how to land it. The result was 9/11.

Another key lesson is that regulators need to pay attention to their regulatory boundaries, including the environment outside those boundaries. Do not be tempted to take on tasks for which you do not have legal authority, and for which you are not resourced. But if you spot something that should not be happening outside that boundary then draw it to someone's attention, and make sure they have understood the importance of your message. "Not my problem, Guv!" won't look good if someone dies when you had been warned and done nothing effective about it.

Another US (and FBI) example was the agency's failure to see the big picture, and involve other regulators, when it spotted an epidemic of home loan mortgage fraud in the years before the 2008 financial crisis. The FBI preferred to focus on files that might deliver longer prison sentences.

The Aboriginal insurance scandal in Australia was an example of a regulator (the Trade Practices Commission, now the ACCC) spotting that major insurance companies were ripping off their customers, particularly in remote Aboriginal communities, and taking strong remedial action including voluntary compensation and significant publicity. This led to many more cases coming to light. The police union, for instance, realised that there were 300,000 victims in its membership.

Within your boundaries, you should take a broad and flexible attitude to your responsibilities.

Information and education campaigns can greatly help to increase compliance. Information gathering and research can also help direct your strategy, whilst intelligent briefing of both the media and politicians can smooth your path. You should be entirely candid about the choices and compromises that you need to make. But don't let the media or politicians drive your behaviour. Regulators are, by their nature, seldom popular.

Note, by the way, that targets and KPIs can be dangerous if they discourage staff from responding flexibly and intelligently to issues that arise in and around their areas of responsibility.

More widely, what combination of culture, skills etc. come together to create effective regulation? Cary Coglianese's Achieving Regulatory Excellence contains much sound advice and many interesting examples. And why not carry out an Effectiveness Review to reveal whether you lead or work for a first class regulator?

Digging more deeply, here are some other aspects of effective regulation:-

Accountability, Independence, Transparency

Other Interesting Stuff

Martin Stanley