Smart Regulations for a Smart Regulator
A regulator by profession, I have always been quizzed as to why regulations were written like a jigsaw puzzle with hidden clues, having multiple answers and without any answer key. Doesn’t sound like a fair game, isn’t it!
This picked my brain, and as I was looking for answers, something caught my eye: the sheer number of advertisements, blogs and write-ups on the internet talking about how to read and interpret the legal rules. This really puzzled me. When public interest is the center-most principle in any new piece of legislation, then why is there so much chaos around the public’s understanding of the rules?
Regulation is and has always been all the action around us. It mutely governs what is and what isn’t possible with the unbiased aim of consumer protection. In pure dictionary terms, “regulations” can be defined as something that is “made by a government or other authority in order to control the way something is done or the way people behave.” For example, in the case of a startup, everything from market penetration strategy to buying a garbage disposal machine for the new office is governed by regulations. A petty non-compliance of the business idea with the laws of the land can cause a company to perish even before its birth.
On the other hand, unregulated businesses would be like football played without rules, sidelines and refs – a chaotic death match. To add to this is the Fourth Industrial Revolution (4IR), which is making compliance managers run marathons without any finishing lines. The Doing Business Report 2019 published by World Bank Group captured a record 314 regulatory reforms between 2 June, 2017 and 1 May, 2018 issued worldwide by 128 economies to introduce substantial regulatory improvements making it easier to do business in all areas. However, this sheer number of reforms implies that the compliance managers would have been forced to read, understand, interpret and comply, if applicable with all 314 new policies newly introduced. This simply drives home the underlying rash conviction that over regulation is better and can prevent financial crisis as the one occurred in 2008, without reducing the likelihood or magnitude of the economic boom that preceded it.
The situation isn’t much better for rule makers as well. In present market dynamics, their role is akin to making rules for a football match, which has already started and is currently way beyond the interval time. Public authorities are further thrown down by the inherent public belief that a regulator knows better than a market participant how best to manage a complex business risk or what is prudent. Such a leap of faith is a critical flaw in regulatory design.
This chicken and egg game is a prime cause for heighted compliance costs, adding to a compliance manager’s woes. As per the 2018 Thomas Reuters Cost of Compliance survey, “Compliance practitioners continue to identify managing and coping with continuing regulatory change as their biggest challenge”. As per this global survey, “61 per cent of firms were expecting an increase in their total compliance budget in 2018 with nearly two thirds (61 per cent) of firms expect the total compliance budget to be slightly or significantly more over the next 12 months”.
This brings the idea of Smart Regulations to the forefront, a key benchmark in regulatory design. It is based on four principles: shared responsibility, creating legal clarity, flexibility to accommodate new technology, and fairness and transparency. Its central idea is to avoid stifling innovation and preventing competitiveness at the same time ensuring pure ease of doing business.
A fitting example of this is the European Union (EU) Action Programme on cutting red tape in 2006. Ever since 2005, “the Action Programme has led to the repeal of 6145 acts of legislation, the withdrawal of more than 300 legislative proposals by the Commission, and led to more than 350 impact assessments since 2010 before proposing new legislation.” The aim of the action programme was to screen the Acquis Communautaire for 13 priority areas to establish the annual administrative cost and administrative burden for businesses and to reduce administrative burden by 25 per cent”.
Another leading example is Canada where Smart Regulations became the principle focus of the federal government-driven regulatory reforms in the mid-2000s. In Canada, it has been characterised by “a restructuring of the process of assessing, reforming and improving the regime in which regulations are developed, managed, enforced and measured.”
Smart regulations isn’t some course that can be learnt in a management school or a university. It is the art and science of rule-making, an expertise developed with experience and a deep understanding of the sensitivity of rule-making. Basically, it requires four key skills:
- Senior regulatory personnel of the right quality and experience, including real industry experience;
- Symmetry of information, experience and intellectual firepower on both sides, the regulators and the regulated;
- An open mind towards change and consistent approach to rule making;
- And, lastly and most essential… coordination, coordination and coordination.
In India, the state of Punjab is implementing smart regulations through the Smart Regulations Act, which will improve the ease of doing business in the province and around the country. Also, the Government of United Arab Emirates (UAE) intends to capitalise on the blockchain technology to transform 50 per cent of government transactions into the blockchain platform by year 2021. This global advent of blockchain and consequential dis-intermediation needs Smart Regulations, which is an effective tool for regulators to reward innovation and punish bad behaviour. Hence, the era of Smart Regulations has just begun.