Blog: Keeping regulation fit for purpose

'Regulation’ is a word that carries all sorts of connotations, depending on whose ear it catches. Yet whatever our personal sentiments may be, the fact is it’s an essential component of any society, often forming the first line of defence against risks which could result in disaster and tragedy.

However, no matter how well-intended it may be, regulation can have unintended consequences. At one end of the scale, people can look for ways around it or simply not comply. At the other, people can over-comply and be afraid to take any risks whatsoever.

It can also push people away, often into unregulated spaces where things are more likely to go wrong. Regulation, and regulators, can also find it hard to keep pace with rapid changes in technology, practices, markets and behaviours.

So how can we keep regulation fit for purpose? We can urge regulators to be anticipatory, responsive, collaborative, dynamic, proactive and – where appropriate – experimental. But this is easy to say and hard to achieve. In practice, regulation is often complex, messy and highly imperfect. Addressing difficult problems involves complicated interactions of multiple people and organisations and often the creation and implementation of many rules and reporting requirements.

So how can regulators and others stand back and think about how the system as a whole is working, in order to enable it to keep pace?

I suggest we think of regulation as a system with six key elements, all of which interact, as illustrated in the diagram below.

Goals and values

We can start with goals and values – what is the regulatory system trying to achieve, and which values is it trying to uphold?

The standard economic justification for regulation since the 1980s is that regulation is there to correct market failures. But regulation has always been about more than that, or indeed not about that at all: it has been focused on managing risks, controlling power, or upholding fundamental values such as principles of non-discrimination, or the rule of law and the administration of justice.

People and organisations

Understanding what we want regulation to achieve is essential, as the debates on the ethics of artificial intelligence in healthcare and other parts of society, for example, are prompting us to do. But that is only the first element.

Regulation also requires people and organisations to change their behaviours – so understanding these second and third elements of any regulatory system is critical to its effectiveness. And regulators do not only need to focus on the behaviours of those they are regulating, or regulating with, but on the behaviours of their own individual staff and of their organisation as a whole, and on how they interact with other regulators within the regulatory system.

Productive interactions and dysfunctionalities can arise in all cases.

Knowledge and understandings

The fourth element is the knowledge and understandings that regulators, and others, have of what it is they are regulating – not only technical knowledge, but system knowledge – of the context they are operating in.

It was largely due to failures to understand the actual operation of the financial markets which led to the financial crisis.

Regulatory tools and techniques

How regulators perceive the world and the problems they have to address is key to the fifth element, which is the design and operation of regulatory tools and techniques.

It is this element which is usually where debates are most focussed: should regulators use rules and/or principles and in what combination; how can they use ‘nudge’ techniques to change behaviour; what are the most effective ways of gaining compliance; what sanctions should be imposed and when – all these are very familiar questions to anyone used to thinking about regulation.

Trust and legitimacy

Finally, but most importantly, is the element of trust and legitimacy.

Regulators need a political and a social licence to act. Powers are delegated to them by elected representatives to achieve certain goals and values, whether those representatives are members of parliament in the case of government regulation, or members of a profession in the case of professional self-regulation. A regulatory system also needs to be trusted and perceived as legitimate by those who are relying on it to protect or support them, such as patients or consumers.

In order to be effective, regulators also need to be respected (though not necessarily liked) by those they are regulating. But as the demands of each group can pull in different directions, so maintaining trust and legitimacy is an ongoing task, dependent on transparency and continual engagement.

This systems framework deliberately breaks away from adopting a ‘toolbox’ approach to designing regulation which has been so prevalent for decades.

Instead it provides a framework for enabling regulators to think systematically about each part of the regulatory system, including their own role in it, for analysing deep rooted causes of failures, for thinking through the potential impacts of changes in any part of the system, and for helping us paint a picture of how each element would need to operate if regulation is to be kept fit for purpose.

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