The Regulatory The Regulatory ChallengeChallenge

Wyn GrantWyn Grant

University of WarwickUniversity of Warwick

The big pictureThe big picture

In this lecture I shall be summarising In this lecture I shall be summarising a vast political science literature on a vast political science literature on regulationregulation

We will discuss PSD related issues in We will discuss PSD related issues in the workshopsthe workshops

My underlying assumption is that My underlying assumption is that regulation is a key task that serves regulation is a key task that serves the public interest – but presents the public interest – but presents many challenges for regulatorsmany challenges for regulators

It all started at Putney in 1647It all started at Putney in 1647

An historical ideal typeAn historical ideal type

Limited/night watchman/Westphalian Limited/night watchman/Westphalian statestate

‘‘The chief end of government is to The chief end of government is to preserve persons as well as estates’ preserve persons as well as estates’ – Major William Rainsborough– Major William Rainsborough

Tasks are defence of territory, law Tasks are defence of territory, law and order; mobilisation of financeand order; mobilisation of finance

1790 – debt, defence and 1790 – debt, defence and administration – 82% of all spendingadministration – 82% of all spending

Keynesian/command stateKeynesian/command state

1890 traditional functions still 1890 traditional functions still account for 65% of expenditure, 20% account for 65% of expenditure, 20% social (mainly education)social (mainly education)

Before First World War government Before First World War government accounts for 15% of GDPaccounts for 15% of GDP

First steps towards new type of state First steps towards new type of state taken with People’s Budget of 1900 taken with People’s Budget of 1900 (Lloyd George)(Lloyd George)

Keynesian Welfare StateKeynesian Welfare State

Promise of full employmentPromise of full employment System of social insuranceSystem of social insurance National Health ServiceNational Health Service Public housingPublic housing Public expenditure grows faster than Public expenditure grows faster than

GDP – a specific political objectiveGDP – a specific political objective Faces a crisis as rate of growth fallsFaces a crisis as rate of growth falls

Concept of regulatory stateConcept of regulatory state

Term originates in work of Chalmers Term originates in work of Chalmers Johnson on Japan (1982) as contrast to Johnson on Japan (1982) as contrast to developmental statedevelopmental state

Historically US was best example, Historically US was best example, regulation preferred mechanism for regulation preferred mechanism for dealing with market failuredealing with market failure

A regulatory state as one that attaches A regulatory state as one that attaches more importance to regulation than other more importance to regulation than other forms of policy makingforms of policy making

What is regulation?What is regulation? Not easy to define but involves application Not easy to define but involves application

of predetermined rules to actions of firms of predetermined rules to actions of firms or individuals for public benefit (in or individuals for public benefit (in principle)principle)

Rule-based behaviour, controlling or Rule-based behaviour, controlling or permitting behaviourpermitting behaviour

Use of institutions of scrutiny and Use of institutions of scrutiny and enforcementenforcement

Technocratic or depoliticised, semi-Technocratic or depoliticised, semi-detached from everyday political detached from everyday political pressurespressures

Moran’s interpretationMoran’s interpretation

(Originally) saw it as ideal typical (Originally) saw it as ideal typical Weberian progressionWeberian progression

Command state involved Command state involved hierarchical, classical bureaucracyhierarchical, classical bureaucracy

‘‘Club government’ – tacit knowledge Club government’ – tacit knowledge of insiders, self regulation (City)of insiders, self regulation (City)

World of command infantilised us all, World of command infantilised us all, subjects rather than citizenssubjects rather than citizens

Regulatory state emergesRegulatory state emerges

Old world undermined by scandal, Old world undermined by scandal, weakened systems of self regulation, weakened systems of self regulation, e.g., financial markets (self-e.g., financial markets (self-regulation survives in sport)regulation survives in sport)

New world of self-steering networks, New world of self-steering networks, governance rather than governmentgovernance rather than government

Regulatory state is a low trust state Regulatory state is a low trust state and a risk stateand a risk state

Many drivers of regulatory stateMany drivers of regulatory state

Majone: EU as a regulatory state, Majone: EU as a regulatory state, comparative advantage is in regulation, as comparative advantage is in regulation, as has few fiscal instrumentshas few fiscal instruments

Modernity multiplies risks, there is a Modernity multiplies risks, there is a heightened sense of risk – a cultural heightened sense of risk – a cultural construction but importantconstruction but important

Low public expenditure way of meeting Low public expenditure way of meeting public demands, costs met by regulatedpublic demands, costs met by regulated

Privatisation leading to utility regulationPrivatisation leading to utility regulation

Scandals picked up by mediaScandals picked up by media

New scandals highlighted by media lead to New scandals highlighted by media lead to demands for government actiondemands for government action

FSA asked to regulate hamper clubs, bus FSA asked to regulate hamper clubs, bus services outside London re-regulatedservices outside London re-regulated

But regulators may clash: Ofcom resisted But regulators may clash: Ofcom resisted Food Standards demands on obesity Food Standards demands on obesity because of responsibility for high quality because of responsibility for high quality tv programmes – ‘two regulators tv programmes – ‘two regulators approaching the same public policy approaching the same public policy challenge from the perspective of their challenge from the perspective of their very different remits’ – head of Ofcomvery different remits’ – head of Ofcom

Arguments for regulationArguments for regulation

Reflects growing complexity of Reflects growing complexity of society, need for task specific society, need for task specific regulatorsregulators

They can bring expert knowledge to They can bring expert knowledge to responsibilitiesresponsibilities

Decisions based on rigorous scrutiny Decisions based on rigorous scrutiny of evidence rather than on party of evidence rather than on party political assumptionspolitical assumptions

But their task is difficultBut their task is difficult

Single issue pressure groups, Single issue pressure groups, reflecting more fragmented societyreflecting more fragmented society

Accountability of such groups to no Accountability of such groups to no one, lack transparencyone, lack transparency

Assertions not backed by evidence Assertions not backed by evidence publicised by the media, especially publicised by the media, especially the case in food chain issuesthe case in food chain issues

Arguments against regulationArguments against regulation

Regulatory capture argument. Largely Regulatory capture argument. Largely invalid. Based on experience in US invalid. Based on experience in US resulting from ‘iron triangles’ of resulting from ‘iron triangles’ of Congressional committees, regulatory Congressional committees, regulatory agencies and regulatedagencies and regulated

Asymmetries of information between Asymmetries of information between regulator and regulated. Can be a regulator and regulated. Can be a problem, but better dealt with by problem, but better dealt with by specialised agencies rather than generalist specialised agencies rather than generalist civil servantscivil servants

Arguments against regulation (2)Arguments against regulation (2)

Replacing decision-making by Replacing decision-making by insiders by decision-making by insiders by decision-making by expertsexperts

Technocratic undermining of Technocratic undermining of democracydemocracy

Moran repudiates benign view, Moran repudiates benign view, empowering civil society, enhancing empowering civil society, enhancing transparency, now sees it as ‘more transparency, now sees it as ‘more threatening and interventionist’threatening and interventionist’

What we have learnt (1)What we have learnt (1)

Need to choose right policy instrumentsNeed to choose right policy instruments Over reliance in past on command and Over reliance in past on command and

control mechanisms, high transaction control mechanisms, high transaction costs, often ineffective, leads to costs, often ineffective, leads to bargaining outcomes (but they have a bargaining outcomes (but they have a role)role)

Cooperation agreements, but above all Cooperation agreements, but above all taxes and trading mechanisms. Carbon taxes and trading mechanisms. Carbon tax arguably best approach to global tax arguably best approach to global warmingwarming

What we have learnt (2)What we have learnt (2)

Need to review structure and Need to review structure and organisation and agencies regularlyorganisation and agencies regularly

Hampton Review in UK Hampton Review in UK commissioned by Treasury, looked at commissioned by Treasury, looked at 63 national regulators63 national regulators

Reduction in number of agenciesReduction in number of agencies Better Regulation ExecutiveBetter Regulation Executive

The regulatory challengeThe regulatory challenge

Regulators have to work within a Regulators have to work within a statutory frameworkstatutory framework

The consequences of making a The consequences of making a mistake is serious, particularly where mistake is serious, particularly where public safety/environmental public safety/environmental protection is involvedprotection is involved

But they also have to respond to But they also have to respond to changing demands in societychanging demands in society

Regulatory innovationRegulatory innovation

Almost a contradiction, but important Almost a contradiction, but important if regulators are to retain trust of if regulators are to retain trust of politicians and stakeholderspoliticians and stakeholders

Exogenous pressures picked up by Exogenous pressures picked up by internal change agents, desire to do internal change agents, desire to do a better joba better job

Value of policy learning from Value of policy learning from regulators outside UK, also from regulators outside UK, also from researchresearch

A need for balanceA need for balance

Who regulates the regulators? The courts Who regulates the regulators? The courts and ministers retain ultimate controland ministers retain ultimate control

Change in architecture of public policy Change in architecture of public policy formation demands care about which formation demands care about which decisions should be made by regulatorsdecisions should be made by regulators

What sort of society we should have and What sort of society we should have and what is unlawful is a political decisionwhat is unlawful is a political decision