Column: Regulatory Capture, Illusion Of Protection

November 26, 2020 | 16 Comments

Ryan Robinson Perinchief Bermuda Jan 2020[Opinion column written by Ryan Robinson Perinchief]

  • A grocery store which repeatedly sells expired foods has never been penalised.
  • A power company pollutes a neighbouring community with harmful soot but doesn’t fall foul of environmental regulations.
  • An association blocks a newcomer’s license to prevent competitors from entering the market.
  • An internet service provider receives regular complaints about poor service, but nothing seems to change – nearly all possible competitors have been bought out or merged.

What do all these scenarios have in common? They are all possible examples of a common problem in economic theory known as ‘regulatory capture.’

There’s been a lot of talk about regulation lately: The Regulatory Authority recently began consultation on the implementation of 5G technology; the BMA has released a discussion paper on its plans to broaden its mandate; and the Premier has announced plans for a soon to be created Police Authority.

In industries that serve critical needs, it is typical for governments to turn to regulation to protect the interests of consumers, uphold professional standards, and promote a competitive economy. This is evidenced in Bermuda by the existence of numerous bodies charged with enforcing rules and making key decisions in relation to a particular industry.

Regulatory bodies often take the form of a dedicated authority or council – examples include the Police Complaints Authority or the Bermuda Health Council. But they can also be seen in other ways: a Public Service Vehicles Licensing Board, Consumer Affairs, or even the Health Department or a council of practitioners for a particular skill.

The idea is that by creating an organisation managed by experts in the field, regulatory authorities can do a better job at looking out for the interests of the public and the island at large.

Unfortunately, when governments aren’t careful, leaving key decision making powers in the hands of regulators can lead to unintended consequences. One such consequence which presents a special threat in a small place like Bermuda is the threat of an issue known as ‘regulatory capture.’

The Problem of Regulatory Capture

Regulatory capture is a failure that occurs when agencies charged with protecting the public become sympathetic to the interests or businesses they are supposed to be regulating. The regulators then make decisions which benefit the agendas of private actors in the industry. These regulatory agencies become ‘captured.’

The result is that there is often a less competitive market that harms consumers while purporting to protect them.

Regulatory capture can look like monopolies that continue to charge high prices; companies that are allowed to merge or acquire competitors – even when this might lead to a dominant market share; or industries engaging in risky practices which are harmful to innovation, consumers, or a country’s reputation or economy in the long run – with little intervention by authorities.

It’s important to note that regulatory capture does not necessarily include acts such as bribery, threatening behaviour, or some secret command laid down by a shadow interest group – these things might occur, but those are examples of corruption, not capture.

Regulatory capture is much more subtle and often unintentional. And according to evidence, nearly all regulatory bodies fall prey to it. How does this happen?

Causes of Regulatory Capture

Regulatory capture is more so characterised by the general attitude of the regulator as opposed to some specific action. While one common example might be providing some incentive to regulators for doing things in a way which benefits the industry, a more persistent form of regulatory capture happens simply because the individuals within a regulatory body see the world through the eyes of the private industry versus the consumers they are supposed to protect.

This often occurs because the members appointed to serve on regulatory bodies usually come from the industry itself. This means they are more likely to meet and engage with colleagues from the regulated companies in professional settings, and may even go back and forth between being a member of the regulatory body and serving as an employee, board member or investor in the regulated company.

If you have a minute, let’s do a simple exercise: look up any regulatory agency, board or committee – any organisation tasked with laying rules or regulations for an industry. Now, visit their staff profiles and identify the employment history of persons tasked with serving as a regulator.

Chances are, many of them will have a long history of working in the same private companies they are now tasked with regulating through a public body.

This makes perfect sense. Of course, in order to be an effective regulator, one should have a level of expertise in the relevant industry. But the problem in regulatory spaces, and especially in Bermuda, is that there is often a revolving door – whereby private corporations and government regulators end up being the same people, shifting back and forth from one role to the other.

The overall result is a ‘cognitive’ or ‘cultural’ capture where regulators and private industry actors enjoy a cordial relationship rather than an adversarial one – which can dull a regulator’s critical perspective.

Another way regulatory capture is often enabled is because the regulatory body will hear from the industry far more than it hears from the public. One can imagine that regulators and firms are in constant communication: on a daily basis, they will exchange data, industry insights and collaborate on various proposals.

Larger corporations may even have dedicated liaisons for lobbying and advancing the private company’s interests. But in the absence of similar pressure from consumers, it is very easy for regulators to lean in the opposite direction. This emphasises the need for active community participation.

Ultimately, all regulators are susceptible to regulatory capture. If left unchecked, the end result can stifle innovation, enable anticompetitive practices, and protect the interests of current players who place profit and market dominance over the needs of the general public.

Now that we understand how regulatory capture works, what can we do to prevent it?

Policy Implications: Mitigating the risk of regulatory capture

  • Whilst it is reasonable to expect that a regulatory body will be comprised of industry experts, this should be counterbalanced with representation from lay members of the public who can provide alternative viewpoints from an outsider’s perspective.
  • Meetings of regulators should be thoroughly documented and constantly publicised. Regulators should have minutes which are open, accessible, and user-friendly, and provide detailed reasons for decisions. An hour-long meeting held by regulatory boards should not have minutes that are one page short with two vague bullet points!
  • Regulators should engage regularly with the public and the use of democratic and collaborative methods should be considered. This could include elected consumer advocates from the public, representation from pressure groups, or even mechanisms for direct democracy such as voting by the general public on controversial decisions.
  • Individuals who engage with private industries should consider the risk of regulatory capture and be conscious of potential biases which may alter their perspectives on key decisions.
  • Public officials and policymakers should be cautious about creating ‘government by committee’ – where unelected professionals are given unlimited power due to meritocratic arguments of being better suited to make key decisions which impact the public.

Overall, regulation is important for the success of Bermuda’s economy and can be done well. But it must always be balanced against the potential for unintended consequences that harm the very public it is intended to protect.

- Ryan Robinson Perinchief is a Bermuda Rhodes Scholar and Master of Public Policy Candidate at the Blavatnik School of Government, University of Oxford. He obtained his Bachelor of Laws at Durham University in the UK and is a graduate of the Berkeley Institute. Ryan is also the Founder and Director of Future Leaders Bermuda. Views expressed are in his personal capacity.

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Comments (16)

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  1. Ringmaster says:

    No comment on the powers of a handful of union members holding the country to ransom over one person being hired to fix a problem? A week to solve when the stoppage was illegal? A week causing undue harm to Bermuda as a whole because a few egos were bruised? Concentrate on the real problems first.

    • trufth says:

      Agree! And again, I ask, WHAT is the penalty for the illegal work stoppage and WHEN will it be imposed?? Someone needs to grow a pair and start imposing the penalties.

  2. Freddy says:

    Eerily reminiscent of the regulatory regime protecting automobile dealerships.

  3. ROBERT STEWART says:

    Good article. The best example is how the Bermuda Union of Teachers has captured the Ministry of Education. Schools are now run for the benefit of teachers, not for the education of children.

  4. Angus says:

    Excellent opinion piece. Hopefully it resonates with those in government and regulatory bodies.

  5. Joel Mwaura says:

    A great article.

  6. Crofton says:

    All of this under a labour government.Espwcially during a pandemic/ recession.God help us.

  7. Question says:

    The worst example of regulatory capture is when the rule of law is compromised. Like when the police “service” is instructed to enforce covid-related laws strictly and rigidly, except when it’s high-profile elite government ministers who are dancing to tables at a party. Then the police accept the instruction to ignore it.

  8. Reality says:

    Great article. It should resonate with regulatory leaders ….. especially those obviously with conflicts of interest. The friends and family saga in Bermuda needs to end.

  9. charter says:

    All government boards should 1) publish their meeting dates and agenda on gov website, and 2) wherever possible be open to the public, and 3) publish minutes. An annual report should give an overview of what the board accomplished in the prior year. This would show which boards were actually doing anything.

    • Bdajay says:

      Yes! And these regulatory bodies need to have very clear processes for members of the public to communicate with them, as well as to lodge a complaint against a regulated entity or against the regulatory body itself.
      My experience with our country’s regulatory councils is that they very much act in their own personal interests, they do not feel they have to answer enquiries or explain their decisions. And they are in the process of creating regulations that make it even more impossible for new competitors to enter certain markets.

      Very worrisome.

  10. Anna Pereira says:

    The Bermuda Monetary Authority is an example of a regulator that collaborates with industry. While it can be said that “Ultimately, all regulators are susceptible to regulatory capture. If left unchecked, the end result can stifle innovation, enable anticompetitive practices, and protect the interests of current players who place profit and market dominance over the needs of the general public.”

    In the example of the BMA, the end result of collaboration with industry is innovative regulation that has served the insurance/reinsurance industry well and elevated Bermuda’s competitiveness and leveled the playing field with other competing jurisdictions. We have Solvency II and NAIC equivalence to show for it which is a testament of foreign regulators’ giving credit to the robustness of our regime and supervision. Not all regulatory bodies should be painted with the same brush. Part of our success in IB is having a regulator that listens to the industry and considers collaboration as key.

    For regulators that have significant financial holdings in the companies they are regulating, one would assume this conflict of interest is addressed and policies are put in place to protect the public, stakeholders and limit self interest. This should be a no-brainer.

    For regulated monopolies and oligopolies, we should also expect to see individuals with industry expertise in company leadership. But that is not always the case. For companies that hire leaders who are PEPs or have government ties and no expertise in the respective field, then the regulators should closely scrutinize the desired intention of the company based on the leadership choice. A political move vs a financial move can lead to unintended consequences that are not always in the best interest of all stakeholders. Motives should be questioned and full transparency provided on performance indicators to determine if they are aligned with stakeholder interest. The days of shareholder interest over stakeholder interest are coming to an end.

    • Angus says:

      Anna – what you have written seems to ramble all over, and spout the standard BMA lines of innovation and industry collaboration without making any clear points. Notwithstanding there are a few things to point out.

      1. As you rightfully identify the BMA is not alone as a regulator in its collaboration with industry as it relates to product and market innovation. However, to the topic of the article “Regulatory Capture” it can be safely said that the BMA as a Regulator is too close to the industry to be an effective supervisor i.e. it’s enforcement lacks as a result of its closeness to industry. In this sense Regulatory Capture has set in and to the detriment of the policy holders. e.g. The BMA is so focused on growing the IB market, as you point out, that it has been invested more in the success of the market than the protection of policy holders – with such protection being its primary function.

      2. Solvency II and NAIC equivalence is banded about as a major accomplishment and recognition of the BMA as a regulator. However, have you ever stopped to wonder why other other offshore regulators have not bothered to seek such equivalence. It’s not that they have sought and been denied, but rather not bothered – why? Is it that such equivalence while beneficial to industry is perhaps burdensome to policy holders? In such a case who is the BMA acting for, industry or policy holders. Are they in fact perfectly aligned with the definition of “Regulatory Capture?”

      In my opinion the BMA has lost sight of its function as a regulator which has resulted in the moral hazard within the industry participants. We saw a clear example of this when the BMA’s lack of supervision was caught out in the Paradise Papers. Firms knowing, and to some extent relying on, the focus of the BMA to be market growth over policy and depositor protection are putting much at risk.

  11. Sherman says:

    This equally makes the case for following most other jurisdictions in the world in introducing a competition law regime

  12. Person with emf sensitivity says:

    This is particularly pertinent right now with the industry heavy panel and biased decision makers supposedly looking at the 5g concerns for the RA – except they have huge conflicts of interest and most have admitted they had already decided – as a person who suffers from emf sensitivity, there will be no escape- if I don’t want diabetes or cancer, I can make lifestyle choices to lessen my risks, but 5g will be added to the existing 3g and 4tg and need to be much closer together and many more since 5g is more powerful but doesn’t travel as far. There will be no escape. The irregular constant pulses of 5g will be 24 hours a day. There is so much peer reviewed published research yet the tech people who want this, including the RA panel, simply say it has all been debunked when it absolutely hasn’t. So thank you me Perinchief for highlighting these issues.

  13. Anthony Crichlow says:

    Great article Mr. Robinson Perinchief. It comes at a time when the Regulatory Authority has been tasked to accept input from the public regarding 5G, but its panel of experts is skewed toward an industry bias that many believe will swiftly rubber stamp an industry approved 5G harmlessness narrative. Given the short deadline, it would appear that a thorough, objective analysis of the impact presented by this new tech is not being sought. What is very concerning is the Regulatory Authority is really not charged with ensuring the safety of any citizens. The Regulatory’s Authority’s purpose needs clarification. In fact, there has been no updated registry of masts and towers erected with multiple antennas since 2009. And since the R.A. have no data on past or present emissions they don’t have any idea of the scope or impact we presently face. And now we are being led to believe a new tech which has been largely controversial, will all be under control. Seems like regulatory capture, indeed.

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