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Written by Martin Stanley

The imperfect regulatory state

In his second blog on regulation, Martin Stanley explores the issues with current methods and questions how to approach regulating big tech companies.

Photo by Angela Compagnone on Unsplash

My previous blog drew attention to the rapid growth of the regulatory state.  Here I suggest that this growth has left weaknesses which need to be analysed and addressed. The principal problem is that resources have not kept pace with demand (where have we heard that before!) – nor have they kept pace with the huge power of the Faangs – Facebook, Amazon, Apple, Netflix and Google.

All recent governments have sought to control regulatory spending, using three complementary approaches. First, there have been a succession of deregulation and better regulation initiatives, which had the virtue of being relatively transparent. Second, Ministers have implemented a range of ‘efficiency’- and austerity- driven reductions in the resources available to regulators such as trading standards officers, the Health and Safety Executive, and planning and building inspectorates. Some of the savings have no doubt been justified, and others less so.  In practice, it is hard to tell whether the cuts have gone too far – until it is clear that precious protections have been jettisoned.

The third set of savings derive from the unspoken assumption that prior (ex ante) inspection and enforcement activity can be run down because we should be able to rely on the deterrent effect of after the event (ex post) enforcement such as prosecutions, reinforced by the fear of damaging compensation claims.  Legislation has, for instance, been introduced to encourage ‘private actions’ – including class actions – in competition law.  And faith in the deterrent effect of compensation may underlie the reductions in regulatory budgets mentioned above.

I am far from convinced that deterrent effects are as large as sometimes supposed. Claims for damages take much longer than firm regulatory activity such as enforcement notices.  And potential offenders never seem to believe that their particular failures might see them ending up in court, whilst the better heeled assume that good lawyers will protect them.

BP and its contractors, for instance, didn’t worry enough about the financial or human consequences of allowing Deepwater Horizon to explode and kill 11 workers. Here in the UK, the corporate manslaughter statistics are fascinating.  There are typically only two or three prosecutions each year (compared with c.140 workplace deaths) - leading to fines of only a few hundred thousand pounds in each case. I don’t see much deterrent effect there. Meanwhile, over in the competition courts, MasterCard’s lawyers successfully resisted a £14 billion (!) class action legal claim – on behalf of all us customers – despite the fact that the company had already been found guilty of abusing its dominant position. And (at least according to Ofcom) fear of a £50m fine did not deter Royal Mail from forcing Whistl out of the mail delivery market back in 2014.

Even if you believe in the theory of deterrence, there are obvious limits to how far we should run down prior inspection and rely on ex post enforcement.  No-one has yet suggested that it would be appropriate in the case of aircraft or nuclear safety. It is chilling to think that excess faith in ‘efficiency’ savings and deterrence might have played a part in the decisions leading up to the Grenfell Tower tragedy.  If so, then UK regulatory policy will surely need a serious re-think.  We can’t say much more, of course, until the Inquiry publishes its report, but we must hope that its lawyers – predisposed and trained as they are to allocate blame - will nevertheless identify deeper systemic causes. The best major accident investigations shift the context from ‘what went wrong’ to understanding why the decisions that people made were ‘right’ given the context in which they were operating. These might well have included regulatory decisions.

Weak regulation (aka ‘light touch regulation’) surely played a big part in the failure of financial services regulation in the run up to the 2008 financial crisis. It is noticeable that it has since proved impossible to pin responsibility for the crash, or subsequent LIBOR price fixing, etc. on any senior bankers. The FT’s Philip Stephens argues that: “The bankers have got away with it. They have seen off politicians, regulators and angry citizens alike to stroll triumphant from the ruins of the great crash. Some thought the shock of 2008 might change things. We were fools. Bankers are still collecting multi-million-dollar bonuses even as they shrug off multi billion-dollar fines.”

Indeed, a large proportion of financial services activity continues to enrich no-one but its providers. Report after report have shown that many fund managers add no value through their services.  The FT’s John Gapper recently suggested that a $58m fee paid to Goldman Sachs was no more than “a kind of alchemy … less to ensure the best possible deal for the client than to make them believe they are getting it”.  Adair Turner debated this some years ago: "It is hard is to distinguish between valuable financial innovation and non-valuable. Clearly, not all innovation should be treated in the same category as the innovation of either a new pharmaceutical drug or a new retail format. I think that some of it is socially useless activity. On the other hand, I don't know whether that means the world would have been better off without any credit default swaps, or simply some credit default swaps."  Maybe some academic firepower can be deployed to answer this question?

Turning to the Faangs, it is now clear that the convergence of communications technologies, together with the ballooning use of social media, are causing huge problems.  As one expert put it: "We don't know what we are regulating. Everything is bits and bytes." A single wire or cable offers access to telephony, email, movies, books, newspapers, Skype, television, and home security services. And one cannot help but sympathise with any government or regulator trying to control companies whose value is measured in trillions of dollars and which benefit from strong network effects - the ‘winner takes all’ phenomenon, powered by the relatively low cost of transport of the product  i.e. the electronic data. We cannot travel far to buy our groceries, however excellent the shops may be in another country. But we can buy entertainment, social media, search and so on from anywhere in the world.

But regulation is surely necessary. It is unequivocally wrong for Facebook to stream live videos of murder and suicide, and for WhatsApp to carry lies about 'child-lifters' which have recently led to 29 deaths in India - and this is only the latest in a countless series of objectionable uses of social media, including using lies to influence political opinion. The public seem to accept these costs whilst expecting the mainstream media (MSM) to self-censor.  The MSM in turn seeks to retain viewers by offering increasing quantities of reality TV of dubious morality. 'Watch and listen again' has destroyed the 9pm watershed, and no child seems to have any difficulty in accessing age inappropriate content.  There is much discussion and debate to be had, but we must now inch our way, step by step, to a sensible regulatory settlement.

  • About the author

    Martin Stanley

    Martin Stanley is the editor of Understanding Regulation - www.regulation.org.uk – a website written for legislators, journalists, academics and others who wish to understand the recent rapid growth of the regulatory state, and how regulation should best be designed and enforced. Martin was previously a senior civil servant, and Chief Executive of (what is now) the Better Regulation Executive, the Postal Services Commission and the Competition Commission.

    Martin Stanley