Regulatory Governance: Issues & Trends

Regulatory Capitalism, Meta-Regulation and Accountability for Regulation

Note prepared for Warwick Law School/Law Commission Symposium on Law Reform and Regulation

Colin Scott

Dean of Law and Professor of EU Regulation and Governance, University College Dublin

1.     Introduction

The financial crises which have enveloped much of the industrialised world since 2008 are only the latest incidents to cause policy makers and academics to question the effectiveness and desirability of dominant models of regulatory governance. Whilst there is widespread disenchantment there is little consensus on either the causes of problems with regulation nor on the possible solutions. It is more or less inevitable that in a crisis vulnerable governments should assert the needs for more stringent regulation and, at least implicitly, attribute responsibility for failures to weaknesses in control. This is not the only way to think about the problem. A precisely converse position would be that market actors placed too much dependence on regulation to guide their behaviour (‘unless it is prohibited I can do it’), taking insufficient responsibility for knowing what they should do upon themselves. There is, of course, a degree of oversight of regulatory policy and strategy. Better regulation policies have tended to focus chiefly on traditional forms of rule making and have not been so strong on encourage the search for effective alternatives to classical regulation.  Law reform policies are not yet well equipped to address general regulatory issues (Brown and Scott 2011).  In this brief note I discuss a variety of conceptions of regulation which underpin the discussions about the appropriate role of government and regulation in steering behaviour with some consideration of the implications for accountability of regulatory regimes.

2.     Conceptualising  Regulatory Governance

Perceptions of weaknesses and strength in regulatory governance will depend in part on what we call regulation. Much ink has been spilt in developing contrasting definitions of regulation (Black 2002). These range between the narrowest concept of a statutory instrument to analyses of processes of control involving rules and/or the state through to the broadest perspective taking in all forms of social control (Baldwin, Scott and Hood 1998). My own view is that different concepts of regulation may be appropriate for different purposes and, that for the purposes of law reform, it may be helpful at least to start from Selznick’s often cited and relatively narrow conception of regulation

‘as sustained and focused control exercised by a public agency over activities that are valued by a community’ (Selznick 1985: 363).

How is control achieved? Regulation scholars increasingly think of the ambitions for control associated with regulation as comprising three elements – some norm reflecting the goals, objectives, rules or standards around which a regime is organised, some mechanism for detecting deviations from the norm and some mechanism for correcting deviations (Figure 1).

Selznick’s concept of regulation, drawn from long-standing American experience with independent regulatory agencies at state and federal  levels, can be mapped on to a range of key issues as to who does what to who and how (Table 1). The classic regulatory model, involving agencies monitoring and enforcing by reference to legal rules is shown, alongside models of delegated and pure self-regulation.

Model	Set Norms	Instrument	Monitors	Enforces	Legal Basis	Enforcees	Example
Classic	Legislature/ Ministers	Primary/ Secondary Legislation	Departments/ Agencies/LAs	Agencies/Local Authorities	Criminal/ Administrative Law	Businesses	Unfair Commercial Practices – OFT/Local Authorities
Delegated Self Regulation	Prof/Body/ SRO	Statutory Codes	Prof Body/SRO	Prof Body/SRO	Administrative Law	Businesses	Broadcast Advertising - ASA
Self-Regulation	Prof Body/SRO	Codes (Contract)	SRO	SRO	Contract	Businesses	ABTA Code of Conduct

Table 1 Regulatory Models and Roles

3.   Weaknesses in Regulatory Governance

If we take Selznick’s definition of regulation as a starting point it is possible to outline a range of widely identified weaknesses with regulatory governance. These weaknesses are partly to do with the capacity of regulatory agencies to exercise controls over others because of limited authority and information, partly about risks regulatory power will be used to pursue private interests of regulators and regulatees, and are lastly focused on concerns about limits to democratic participation in and accountability for regulatory activity.

a.     Capacity

Regulatory capacity is concerned with having the resources necessary to exercise control. Following the classic NATO analysis associated with Christopher Hood these resources can be identified as nodality, authority, treasure and organisation (table 2).

Table 2 Regulatory Resources . Source adapted from  Hood 1984; Hood and Margetts 2007.

The concept of nodality focuses on the importance of both the collection and dissemination of information for steering behaviour. Economists have long recognised that regulators may suffer from information asymmetries where regulatees know a great deal more about such matters as costs than do the regulators.  The significance of soft mechanisms of steering which deploy information probably remains under-stated both in policy and scholarly literatures. Weaknesses in knowledge of regulators may extend beyond information per se  to generate an epistemic or cognitive dependence on regulatees in understanding what is thinkable and doable within a particular regulated sector (Hardwig 1985; Power 2003). Turning to authority, the Canadian administrative lawyer, John Willis, coined the phrase ‘governments in miniature’ to capture the authority capacity of North American regulatory agencies to make, monitor and enforce legal rules within a single agency (Willis 1958). Within most Westminster systems of government regulatory agencies typically lack the authority both to make rules and to apply formal sanctions directly and, indeed, Canada experienced a retreat from the US model in the second half of the twentieth century (Doern and Schultz 1998). Accordingly most regulatory agencies are dependent on legislatures (for which read governments) for new or adapted legal rules, and on the agreement of courts for the formal enforcement of rules. The exceptions to these significant capacity limits, for example the power of the Financial Services Authority to make detailed rules, or the Office of Fair Trading to levy fines in respect of breaches of competition law rules, constitute exceptions to the more normal constraints and, like the counterpart powers of American independent agencies are hedged around by significant and potentially onerous procedural requirements. The point here is that while regulators may take on a purposive approach to their tasks, considerations by legislatures and courts as to how they should respond to regulator seeking rules or sanctions are likely to be tempered  by very different considerations (Scott 2001) . The resource position of regulatory agencies in terms of finances and organisational capacity varies by sector and across time. Clearly few regulators have unlimited resources. Many regulators develop enforcement strategies which emphasis negotiation of compliance with businesses in part because this conserves resources, enabling them to spread enforcement efforts over a wider range of businesses.

b.    Interests

There has been long-standing anxiety that the concentration of regulatory power in agencies may encourage businesses to seek to steer the use of regulatory power for their private purposes. Theories of regulatory capture are well established and involve ideas either that regulatory regimes are established with a view to protecting narrow private interests (Kolko 1965; Stigler 1971)  or that the close relationship between regulatees ad agencies makes it likely that regulators will come to understand and sympathise with the problems of regulatees, and reduce the stringency of regulation (Bernstein 1951; Grabosky and Braithwaite 1986). The latter scenario is supported by evidence that senior officials from regulatory agencies, in some jurisdictions, tend to secure employment with firms they used to regulate, arguably rewarding them for applying rules with reduced stringency (Makkai and Braithwaite 1992). The phenomenon of the ‘revolving door’ is termed amakaduri, or ‘descent from heaven’ in Japan (Colignon and Usui 2003).

c.     Democracy

A third set of concerns with classic models of regulation is that they operate at one remove from democratic governance. Indeed, theories of credible commitment associated with the establishment of regulatory agencies argue that a central objective of establishing regulatory agencies is to reduce the extent to which regulatory decision making may be subject to political intervention (Thatcher 2002). This has had particular importance in network industries where the capacity to secure long term investment in energy and communications infrastructure is premised on a belief among the firms and investors that the regulatory regime will be relatively stable and not subjected to political opportunism. A distinct argument in favour of putting regulatory decision making at one remove from politics is that this enables agencies to build up and deploy expertise which is not typically available in general civil service departments (Everson and Majone 2001). On these analyses the lack of democratic engagement with agencies is a virtue. However some question the extent to which regulatory decision making can really be neutral or apolitical, for example highlighting the distributive consequences of decisions concerning such matters as pricing of services or the broad impact of environmental decision making (Prosser 1997). A distinct democratic concern from the question who makes and applies regulatory rules, applying both to public and private regulators,  lies with their accountability to public bodies for their actions. Accountability for regulatory decision making is a perennial concern (House of Lords Select Committee on the Constitution 2004).

4.     Regulatory Capitalism and Meta-Regulation

From the perspective of critiques of the classic agency conception of regulation, concerned with capacity, interests and democracy, alternative ways of conceiving regulation have much to commend them. Regulatory capitalism recognises the diffusion of capacity and a high degree of interdependence which is in turn suggestive of a move beyond control to models of regulation based more in learning (Scott 2010). The literature on regulatory capitalism acknowledges the growth in regulatory forms of governance (more rules, more arms-length agencies and so on) but suggests that the growth in private regulatory capacity is at least as important (Braithwaite 2008; Levi-Faur 2005) . Public and private capacity relevant to regulation are seen as parallel and interdependent phenomena. To the extent that such an analysis proves correct it clearly has implications across the range of issues briefly addressed in this note.

a.     Capacity

Within the perspective of regulatory capitalism any assumption that regulatory capacity lies only with government and its agencies is abandoned. The state is de-centred (Black 2001). The challenge for regulatory capacity lies in an understanding that a wide range of organisations have substantial autonomy vis-a-vis one another. Rules can be made and enforced using bilateral or associational contracts. The big supermarket chains might be seen as important for the regulation of food safety and quality as the Food Standards Agency or local authority regulatory officials. Monitoring can be carried out by purchasers, self-regulatory bodies or third parties. Third party monitoring might be purchased under contracts (Blair, Williams and Lin 2007) or mandated under legislation, as with money-laundering reporting requirements on banks and professionals, or immigration control duties imposed on airlines (Gilboy 1997). Governmental and private actors may each been seen as having regulatory objectives within their sectors with no priority given to the governmental definition of the public interest. On this analysis the challenge is to identify who has the capacity to set objectives and rules, to monitor for their compliance and to correct deviations from those norms. In some instances we may conclude that some conception of public interest can only properly be pursued through the involvement of government agencies at every stage, in other instances the configuration of interests and actors in a sector may lead to the conclusion that no public involvement is required for the generation of effective norms and mechanisms of implementation and/or that public engagement may be counterproductive (Scott, Cafaggi and Senden 2011).

b.    Interests

It is widely assumed, following Adam Smith, that the establishment of private governance capacity is always directed towards pursuing the private interests of those involved. However, there are many examples of private regimes which have long been accepted as operating in the public interest. Perhaps the most numerous are those involved in the setting of technical standards by national and international standardization organisations and the numerous more specialised organisations concerned with such matters as electrical standards (Brunsson and Jacobsson 2000) . The rationale for such standardization bodies is that their activities facilitate doing business by ensuring the acceptability of components & products across sectors and jurisdictions. There is a degree of alignment between the public interest in having efficient markets and the private interest in being able to participate in those markets. The line between legitimate standardization and a cartel may often be a fine one (Maher 2011). Whereas standardization regimes frequently involve a common interest, many regimes involve conflicting interests , for example concerning environmental standards. In this instance we might think that divergence of interests provides an argument for public regulation and in many cases that will be true. However, to the extent that the existence of parties with conflicting interests may have capacity to represent and argue over positions then the establishment of sites of discussion and negotiation may provide an alternative which harnesses the knowledge, interests and capacities of those involved. The scheme of Environmental Improvement Plans in Australia, which involve local stakeholders in agreeing and monitoring the plans put forward by companies provide an example (Holley and Gunningham 2006).

c.     Democracy

The idea that regulatory regimes may constitute sites of political contestation, rather than technical decision making, has particular purchase in the context of transnational private regulatory regimes (Bartley 2007), where private and public governance may be in competition and the stakes in terms of worker rights, environmental standards and so on may be high. In many non-state regimes there is at least some evidence of an evolution in decision making towards practices and norms that bear resemblance to administrative law doctrines which provide for participation and fairness for those affected by a regime. Even in highly technical regimes of standardization it is striking the extent to which good governance principles have come into play as part of processes by which lead organisations seek to manage their legitimacy (Black 2008; Schepel 2005). If the decentring of the state is to be as effective as it is inevitable then it is arguable that more work needs to be done both to stimulate organisations with regulatory capacity towards one or more forms of democratic decision making and to understand the variety of forms which such decision making might take. The distinct questions of accountability for regulation find some answer in the model of regulatory capitalism which recognises that diffuse capacity within regulatory regimes leads to a form of interdependence between regulators, regulatees and others with relevant capacity (Scott 2000). This interdependence is exploited in the model of meta-regulation discussed in the next section of this note.

5.     Meta-Regulation & Accountability

No doubt there are many spheres of regulatory life where the state retains a central role. This note discusses claims that in many regimes non-state capacity is also significant for effective and legitimate regulation and in others the state has less significance. Such an analysis suggest that governments and state agencies might be more effective were they more modest about what they could achieve directly. Such regulatory modesty involves an inquiry into the variety of ways in which behaviour might be steered. Where regulatory capacity substantially lies with others the concept of meta-regulation offers a valuable way for thinking about the potential for indirect control and for stimulating learning in target organisations (Parker 2002). The analysis  has been extended beyond what we might think of as self-regulation to apply also to the self governance of companies (Parker 2007; Scott 2008). For reasons of space I do not address corporate governance issues in this note.

 In this context meta-regulation refers to the regulation of self-regulation (Parker 2002). The potential of meta-regulation and related forms of regulatory experimentation lies in the ways it encourages groups with regulatory capacity, such as firms, trade associations and professional bodies, to learn about and implement regimes of self-governance, whilst being held accountable for those self-regulatory activities (Gilad 2010). Examples have emerged in the UK in the oversight of both medical and legal professions. The Council for the Regulation of Health Care Professionals (to give the Council for Healthcare Regulatory Excellence its statutory name) was established in 2003 to oversee a wide range of statutory regulatory bodies each of which has a significant self-regulatory element. Key powers include the capacity to monitor and investigate performance and to recommend changes, and refer outcomes of disciplinary cases to the courts where outcomes are judged to be unduly lenient  (National Health Service Reform and Health Care Professions Act 2002, ss 26-29).In similar fashion the Legal Services Board is a statutory overseer of the self-regulatory capacity (some of which is underpinned by legislation) for the legal profession in England and Wales. The Legal Services Act 2007 required the professions to separate their regulatory and representative roles and provides for meta-regulatory oversight of the former by the Legal Services Board.  

Whilst the oversight of self-regulation in the medical and legal professions  show examples of explicit, statutory meta-regulation, other examples may be implicit. It is widely recognised, for example, that the Advertising Standards Authority, established in 1961 to provide sufficient self-regulation of the advertising industry to bolster its reputation in the face of criticism of its techniques, has been subjected to advice and warnings from government on a number of occasions which required enhancements both to the substantive and procedural elements of the regime. Such enhancements where bargained for in the shadow of legislation (Baggott and Harrison 1986). It is significant that advertising self-regulation is also bolstered by participation in a European network, coordinated by the European Advertising Standards Alliance, which has given it significant credibility within the EU (European Commission 2006).   Self-regulatory bodies for the press sector have periodically been encouraged to raise their game with discussion by government ministers of ‘the last chance saloon’ and similar threats. In Ireland and Press Council and Press Ombudsman were established by the industry in 2008 under coercion from a government threatening legislation. Further sophistication was added to this implicit steering through provision in the Defamation Act 2009 (s.44) that the minister could give statutory recognition to a press council provided that it complied with minimum requirements for a scheme of self-regulation set out in Schedule 2 of the Act.  Statutory recognition confers various benefits on the scheme and its members, including qualified privilege for its reports.

The technique of giving statutory recognition to self-regulatory codes which comply with minimum standards is, of course, not new. It was, for example, one of the unexpected successes of the (now superceded) Fair Trading Act 1973, as it encouraged a wide variety of trade associations to develop and enhance their self-regulatory regimes in order to secure recognition from the Office of Fair Trading . The Unfair Commercial Practices Directive includes amongst its misleading actions ‘non-compliance by a trader with commitments contained in codes of conduct by which the trader has undertaken to be bound’ where the trader has undertaken to be bound by a code and its commitments are not simply aspirational (2005/29/EC, art 6(2)(b)). Such actions are criminalised both in Ireland and the UK (Consumer Protection Act 2007 (Ireland), ss45, 47, Consumer Protection from Unfair Trading Regulations  2008, SI no 1277/2008, regs 5,9.). This oversight does not set any minimum requirements for self-regulatory codes, but rather holds businesses to their commitments to follow them.

6.     Conclusions

Any attempt to work out appropriate regulatory responses to policy problems is likely to be shaped both by conceptual understanding of regulation, and the understanding the makeup of the targeted sector. The approach set out in this brief note suggests it is worth taking time to puzzle over issues such as the distribution of regulatory capacity and then to find ways to harness and oversee that capacity, whether it is held by government, associations, firms or NGOs. Such an approach has potential to engender stronger engagement between the variety of stakeholders within any regime and, arguably, a better understanding of the regime through which to achieve a degree of accountability. The approach has potential to address not only issues of capacity, but also the scope for alignment between public and private interests and regulatory regimes, and issues of democratic participation and accountability.

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