A whilc back ‘principle based’ regulation was all the rage. Outcomes based regulation is another catch cry. In an interesting paper Chris Berg of the IPA argues that the ‘mega regulators’ of Australia – the ACCC, APRA and ASIC – have now carved out for themselves such discretionary power that it’s a worry. We know so little about this that he may be right. Certainly the issues he elaborates on are worth considering. But Berg is not very explicit about what the alternatives are and why they’re better. Of course he would say ‘less regulation’ and suggests that more ‘black letter’ regulation might be better than all the essentially unaccountable discretion that the mega-regulators have.
But to be convincing I think those propositions need to be argued with closely analysed examples. I don’t think Berg’s paper succeeds in doing that.
And while Chris Berg is noticing the downsides of regulation in the lucky country, James “wisdom of crowds” Surowiecki writes that things aren’t so good in the stroppy country either. (I’m talking about the US here where Hillary has just said that the US should leave no option off the table in dealing with Iran and that it could obliterate it if it nuked Israel. I guess she’s just trying to be firm and frank here. One has to do that with these kind of people.)
[T]he most interesting thing about [Paulson’s plan for reregulating financial markets] it is something subtler: a push to move from our current system of regulationoften known as rules-basedtoward a principles-based approach. In a rules-based system, lawmakers and regulators try to prescribe in great detail exactly what companies must and must not do to meet their obligations to shareholders and clients. In principles-based systems, which are more common in the U.K. and elsewhere in Europe, regulators worry less about dotted is and crossed ts, and instead evaluate companies behavior according to broad principles; the U.K.s Financial Services Authority has eleven such principles, which are often deliberately vague (A firm must observe proper standards of market conduct). This approach gives companies more leeway in dealing with investors and customersnot every company needs to follow the same rules on, say, financial reportingbut it also gives regulators more leeway in judging whether a company is really acting in the best interests of shareholders and consumers.
Surowiecki then goes on to make some interesting comments about how American football is rules based and soccer is more principles based. He is in little doubt that principles based is best. I suspect he’s right. But he doesn’t come to grips with one of principles’ principal problems – firms and particularly directors spend a lot of time trying to figure out what their responsibilities are, because under principle based regulation things are both more uncertain and more fluid – more susceptible to judicially perceived changes in social expectations. How far should Australian directors go to address various expectations for instance? It’s often not very clear.
So I think we’re broadly going in the right direction. But like choosing between different variants of capitalism, it’s difficult to be confident of what’s best.