Economists and policymakers ask: Who Regulates the Regulators?

18 April 2011

On Thursday 14th April at Jesus College, FLJS brought together a roundtable of expert academics and policymakers to ask, Who Regulates the Regulators? Following the Independent Commission on Banking's recommendations for reform of the financial system, the workshop examined the accountability and liability of regulators in banking and other sectors, and featured a panel including Baroness Deech, Chair of the Bar Standards Board, and Lord Bradshaw, the Liberal Democrat peer.

Professor Alain Jeunemaitre, drawing on his experience studying the French Anti-Trust governance framework under the Prime Minister, opened the workshop with an assesment of regulation across Europe, stating that transborder crises with a high component of systemic domino effects are confronting regulators increasingly frequently. He identified the establishment earlier this year of the three European Supervisory Authorities as the first step towards a single European Regulator along the lines of the Securities and Exchange Commission in the US. Despite this, he found that, in times fo crisis, EU member states interpret the precautionary principle in very different ways, according to their own legal system.

"transborder crises with a high component of systemic domino effects are confronting regulators increasingly frequently

The discussion was opened up to the panel, and focused on the benefits of self-regulation, which was found to be particularly true in industries of rapid development, where only practitioners are able to fully understand the operation of the industry, and, as noted by Baroness Deech, in professions such as the law and broadcasting, where accountability is to the public rather than to government. The pressure brought to bear on regulators was raised by Lord Bradshaw, who identified the pressure applied not only by the law, but also by the media, which can induce a short-termist approach to regulation.

The economist Chris Decker's analysis focused more specifically on the UK, attributing the current glut of regulatory reforms not only to the Conservative pre-election manifesto to excise policymaking functions from regulators, but also to the age of many regulatory bodies that were established twenty years ago in the economic liberalisation of the Thatcher years. He identified a possible crisis of identity in some regulators, who are unclear as to whether they should act as arbiter, tribunal, or consumer champion, and set out an assessment of the purposes, organisation, and supervision of regulatory authorities.

"Dr Decker identified systemic problems such as the imprecise and potentially competing objectives of some regulators; Capture Theory, whereby regulators become beholden to special interest groups; and, most significantly, Confirmation Bias

In a wide-ranging presentation, Dr Decker identified systemic problems such as the broad, imprecise, and potentially conflicting objectives of some regulators; capture theory, whereby regulators become beholden to special interest groups; and, most significantly, the potential for confirmation bias. This latter theory describes an approach to information gathering which inappropriately bolsters a particular hypothesis or beliefs in a context of uncertainty, and was used by Dr Decker to speculate as whether this may have been one of the reasons why banking regulators may not have xplored the possibility that credit might dry up prior to the economic crisis of 2007. He argued for a more 'sympathetic' approach to regulatory decision-making, one that offers more engagement with hypothetical scenarios and possible outcomes, to forestall potential problems before they emerge.

Following a review of the existing accountability mechanisms in place, Dr Decker addressed the challenging question of exactly what recourse there is when a regulator makes a mistake. Citing the interim ICB Report, he noted that regulatory frameworks can be subject to independent scrutiny and review, before looking at recent measures to break up or amalgamate failing regulators, such as the reforms to split up the Financial Services Authority. Lastly, Dr Decker turned to the measure of judicial review, which, he concluded,  may prove less than effective when the decision is sent back to the regulatory body, and invariably, the same regulatory remedy applies.