Like describing a hippopotamus: what makes a good regulator?

By David Donaldson

Wednesday July 15, 2020

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Regulators need to be independent, but what does this mean in practice? Peter Shergold and Graeme Samuel recently offered their thoughts to the ANZSOG regulators’ community of practice.

The ideal regulator must crack down on bad actors, but also allow business to flourish. They need to closely understand regulated industries while remaining independent. They have to be careful, but also react swiftly.

Graeme Samuel
Graeme Samuel

Which is to say: there are a lot of countervailing expectations of how a regulator should act.

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“Frankly I regard a good regulator as a bit like a hippopotamus: you sure know one when you see one, but they’re darn difficult to describe,” says Graeme Samuel, former chair of the Australian Competition and Consumer Commission.

Take independence, for example.

Enforcement-focused regulators need to maintain independence to avoid becoming “Trumpian”, Samuel told an ANZSOG National Regulators’ Community of Practice event this week — choosing to enforce the law against some and not others can quickly give the impression of corruption.

For other types of regulators, too much independence threatens to undermine democratic principles, as those more focused on administration are often expected to deliver on the government’s policy agenda.

“There will be organisations in the regulatory sphere that will be subject to government policy settings from time to time as they arise, and that’s appropriate. The important thing is to have government, parliament, make it clear that this is what we expect.”

Nevertheless, maintaining independence in carrying out that job is vital. This often means saying no when the minister asks you to appear by their side for a press conference, and it means turning down a lot of industry lunch requests, or even social invitations.

And regulatory capture does happen, often when somebody becomes over-excited about the industry’s contribution to society.

But you also need to avoid making decisions based on public pressure. The media love to talk about the independence of regulators, but can easily become conduits of influence themselves.

“The media want you to act independently, providing you act in the way they dictate that you should act,” says Samuel.

Parliamentarians too. He recalled when the ACCC was looking into the two big supermarket chains.

“There was a lot of parliamentary pressure from particular parts of government to say, hold on, these are big gorillas and they ought to be constrained and you ought to be helping the independent operator that’s out here on the side. I took a strong view that that was misplaced, that there were some vested interests that were pushing those sorts of issues.

“If you’re not careful, parliamentarians can push you into a position of capture that again impugns the integrity of the organisation and impugns the sole pursuit of the public interest, which is really what you’ve got to be focusing on.”

And of course there’s the challenge of public expectation, which doesn’t always align with reality.

“Try as I might over the eight years I was there, [I] could never convince the public that the ACCC had no power to deal with the pricing of petrol, other than to ensure there were no collusion, cartel operations occurring that were anti-competitive.”

Commentators like Alan Jones would regularly criticise the ACCC for this perceived failure. Correcting these views — or avoiding creating them in the first place — is important.

“Partly regulators can be to blame for that, because they create by their own rhetoric the expectation that they’re going to do things. So they jawbone, they try and shame companies.

“Then [commentators] say ‘right, you’ve been talking about this mate, get on with it, you’re the regulator, stop them overcharging’. Then you’ve got to say, ‘actually that’s not my power, I don’t have any role to stop them overcharging’.”

The easiest way for a government to influence a regulator is by underfunding it.

“The only way you can deal with that is to actually say so publicly,” Samuel advises.

“I don’t mean that you go out there and you make a media release, but if it comes up in Senate estimates or whatever it might be, you say: ‘I just can’t do all this, I haven’t got the money, the resources are not there to do it’.”

There are a few key skills needed for a good regulator.

“They’re not that easy to find, the good ones. … Clearly, management leadership is a very important element. It’s that ability to lead a group of people who are part of the regulatory institution and establish a culture that is appropriate for the institution.

“Number two, an individual who is absolutely inflexible in putting the public interest first, and is not able to be swayed by private vested interests, by political interests.”

The third factor is that that person gains what Samuel calls “psychic income” from the job. Though, he warns, this can go two ways.

“In the good description it’s the sense that you’re doing something that’s really useful, that’s really in the public interest,” he explains.

The other version is someone who is attracted to power — they know they can pick up the phone and get other powerful people on the line.

“When that occurs, you’re in real trouble, because that’s what then leads you to sacrifice integrity, both personal and institutional integrity, in favour of the poor definition of psychic income.”

He also warns that it’s not easy to define good regulator performance abstractly.

“Quantitative KPIs are very dangerous, because they lead you to take actions that you shouldn’t necessarily take in the best interests of being an effective regulator. Qualitative KPIs can be useful, if you like, statements of expectation. But again, a bit dangerous.”

Inside or outside?

The authorising legislation is the most important factor ensuring a regulator’s ability to work independently, says Peter Shergold, former secretary of the Department of Prime Minister and Cabinet.

Peter Shergold
Peter Shergold

Regulators need to be clear on what their functions are — look at what the legislation says your job is, whether it’s enforcement, education, providing advice, or other activities. Know which powers you’re using, and know the difference between them.

“I’ve seen many regulators who get those confused, and that, I think, is disastrous.”

Sitting inside a doesn’t department necessarily mean you’re less independent than if you’re outside, he thinks. How you use the position matters.

“A regulator sits better with citizens, with those that are regulated, if it seems to be at arm’s length from government. But that’s not impossible in the department.

“When I was secretary in the Department of Employment and I ran the Job Network, I was in charge of the second employment contract, which was highly political, but I had been delegated that role. I sat there doing it with a probity adviser. And the decision I took there as a departmental regulator was probably more controversial than any decision I’ve ever taken as an independent regulator.”

A regulator also needs to have the trust of those it regulates.

“If you fall back on statutory power in an inflexible way, then it may not work,” he argues.

Shergold, who is now chancellor at the University of Western Sydney, recounted the early days of the universities regulator, the Tertiary Education and Quality Standards Agency.

“In the first year of TEQSA’s existence, the pushback was extreme. The pushback in terms of, ‘my god, the burden of administration is being imposed on us here, it’s simply too great, and we can’t see much that is being added.'”

This led to a political reaction, and Shergold was asked to be the chair of the TEQSA advisory committee, an attempt at putting the body in touch with the concerns of the sector, to regain trust.

“In fact I thought the regulator then responded very well, started to talk about regulatory necessity, risk reflection, proportionality, all those sensible things — and work with the sector.

“Out of that, I don’t believe the sector has ended up less regulated than would have been the case. What you do have though is a sector which is much more supportive, because you’ve got a sector that can actually see the benefit of the regulatory role played by TEQSA. So I don’t think every time you just inflexibly apply the statutory powers you have.”

And it’s important to be tuned in to the political context, even in a job that prizes independence.

“If you are a regulator and you are not alert to the political climate — the small-p political climate — in which you’re working, even as a compliance regulator, you may actually undermine the power you possess,” he says.

He gave the example of financial regulators ASIC and APRA, and their change of pose following the banking royal commission.

“It didn’t take much to realise there was a change in the political wind from a government that was hopeful of light-touch regulation to ‘go in harder with black letter legislation, the regulators aren’t tough enough’. Does anyone honestly think the way APRA and ASIC are working now is not different from three years ago?

“That’s because if they want to stay in there and be — as they must be — able to influence, not just be independent, they need to have a sense of the environment in which they operate, which may not be reflected … in the legislation.”

Shergold also sees regulators as holding an important role in the current moment of democratic malaise.

“Why do governments and why do citizens want regulators? I think they usually want them to be absolutely convinced that in our system of democratic governance, the authority of the executive is being wielded with integrity, that there is no conflict of interest, there is no bias, there is impartiality,” he says.

“I think it’s become more, rather than less, important. These are challenging days for democratic governance. Faith in democratic principles has significantly fallen, especially amongst the young. There are very low levels of trust in politicians here and overseas.

“And therefore, it seems to me both an impartial public service, and ‘independent’ regulators have really got a crucial role in trying to maintain and restore confidence in the way our democratic governance works.”

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