Our irregular regulators
Without better reform of the UK's political institutions for taming corporate power, a durable regulatory system cannot be developed, Prem Sikka
guardian.co.uk, Tuesday 29 January 2008 11.00 GMT
The Treasury select committee's (pdf) report on Northern Rock is critical of the Financial Services Authority (FSA). Its quick fixes rearrange the regulatory deckchairs, but do not offer a deeper analysis of the regulatory problems.
The UK has failed to develop an effective independent regulatory system. Large swaths of public policymaking have been handed to unelected and unaccountable corporate elites. In 1997, a UK government report on Guinness Plc characterised the City of London as a place with "cynical disregard of laws and regulations ... the cavalier misuse of company monies ... a contempt for truth and common honesty". Yet there has been no fundamental change in regulatory culture.
The main task of any business regulator should be to make corporate power accountable. Companies are focused on pursuit of private profits, at almost any cost. Since profits play a major part in the calculation of executive remuneration, company directors have incentives to cook the books. As the average tenure of FTSE 100 chief executives is around four years, and declining, there is every incentive to indulge in high-risk and even dubious activity to maximise personal gains.
The FSA and the Financial Reporting Council (FRC) are all dominated by the corporate interests they are supposed to regulate. The FSA permits companies to sell financial instruments without ever testing them for their potential to bring mass destruction. It did not scrutinise the business models developed by banks. Neither the FSA nor the FRC said boo to any company that failed to fully report their toxic investments, or auditors who approved such accounts. Rather than regulators, they have been busy acting as cheerleaders.
A necessary condition of effective regulation is that there should be a distance between the interests of the regulators and the regulated. The regulators should primarily be concerned about the welfare of citizens, consumers and society generally. They need to have different values, vocabularies, agendas and priorities. They should not have a cosy relationship with the regulated. Yet the regulators are too close to corporate interests. They do not owe a "duty of care" to anyone affected by their myopia. They routinely hold discussions with corporate barons and neglect victims of corporate misdeeds.
With complexity of commercial activities, regulators need some expert input and thus need to consult the relevant corporations and industries. However, that should not result in domination by technical experts. As a crude analogy, consider the case of nuclear energy. In building any reactor and power plant, nuclear experts should be consulted, but whether we should have nuclear energy is a social and political decision. Since the consequences of nuclear power affect all citizens, bodies representing wider social interests should make the ultimate decision. The same logic should apply to all public policymaking. The industry experts should not be in the majority on any regulatory structure. Thus others need to be persuaded to build a consensus, rather than like-minded technical experts agreeing on things and organising wider social issues off the political agenda. All regulatory bodies should be open and have a plurality of interests represented on them. Their correspondence, minutes and background papers should be publicly available.
The possibilities of constructing responsive regulatory structures are, however, constrained by systemic forces. With the state's reliance on private capital to stimulate the economy, its interests have become central to all domestic and foreign public policymaking. At the same time, governments seek to persuade people that capitalism is not corrupt and that governments can tame the worst aspects of corporate power. These contradictions create space for developing responsive regulatory structures, but the possibilities are stymied by the close links between corporations and political institutions.
Big companies fund political parties and always manage to get a return on their investment. Corporations offer lucrative consultancies and jobs to former and potential ministers, to advance their narrow commercial interests. Senior civil servants and company executives also move through the revolving doors to build ideological consensus on business friendly policies. The interests of consumers and citizens are easily marginalised.
The political system does not encourage governments to listen to critical voices. A minority share of the votes cast, gives political parties a control of the House of Commons. Therefore, they have little incentive to build any consensus or listen to alternative voices. Members of parliament can sign critical motions, but governments ignore them. Many MPs are just voting fodder and rarely vote against their party's position. The potential of select committees to scrutinise government policies is also limited. The composition of select committees is often decided by the party hierarchy and some independent-minded MPs can be kept off such committees. These committees have limited resources and are rarely in a position to initiate legislation.
Without a deeper reform of the political institutions and policies for taming corporate power, a durable and responsive regulatory system cannot be developed and the UK is fated to repeat the past scandals