This guest editorial has been written by James Shipton, Senior Fellow at Melbourne University’s Law School, University of Melbourne
In Australia the ‘regulatory state’ has become so pervasive that almost every aspect of life, especially commercial life, is impacted by regulation. Nevertheless, most regulators suffer from chronic flaws and false operating assumptions. I recently published a paper that explores these twelve chronic flaws [1] that, if not addressed, will mean that most regulators will struggle to succeed; indeed, many are designed to fail. Some of these flaws and false assumptions are set out below.
First and surprisingly, regulators are rarely invested with a clear and precise statutory mandate. To the contrary, it is common to observe complexity, competition, conflict, and tension; often there are no statutory objects at all. All this has led to the sobering observation that “regulators are seldom, if ever, involved in the mechanical transmission of statutory objectives into results on the ground”.
Conceivably, vague or conflicting regulatory objectives could be made manageable if there were governance structures that legitimised the regulator’s exercise of the wide discretion needed to operationalise them. Unfortunately, good governance structures rarely exist and an expectations’ gap in the regulator results. This gap is very often filled with a multitude of conflicting and non-binding external expectations. Therefore, it is hardly surprising that regulators are constantly criticised for ‘not doing their job’ since their ‘job’ is not clearly defined!
Second, where regulators are established as independent agencies, that independence is often ill-defined in legislation; often some functions are deemed independent but others not. Independence is also, as a practical matter, illusory since a regulator: (i) is dependent on the government for funding; (ii) can be subject to government direction or statements of expectation; and (iii) has it most senior officials appointed and reappointed at the government’s discretion.
Third, despite the existence of accounting standards that enable commercial enterprises to clearly report on their performance, there is no universally accepted framework to assess regulatory effectiveness. Instead, it is common to see different frameworks being applied at different times. Whilst these may be useful for their stated, near term, purpose they do not enable consistent and enduring evaluations necessary for continuous improvement. It is a stark observation that regulators (unlike their private sector peers) lack meaningful historical and consistent performance comparisons.
Fourth, regulators are monopolies; they are, by design, the exclusive holders of their public functions and powers. There are no alternative or competing agencies with the same responsibilities; accordingly, there is no risk of losing ‘market share’. This means, unlike the private sector, there is no competitive tension continuously driving improvement, innovation, and efficiency. Instead, many regulators (like many other bureaucratic institutions) suffer from organisational challenges inherent in monopolistic corporations. And whilst this may be a statement of the obvious, it is not obvious that it is addressed by regulators and governments who rarely, if ever, see themselves in this light and put in place compensating structures.
Fifth, the lack of effective oversight means that the regulatory state is not properly and fully answering to government or parliament. The regulatory state emerged from the delegation from the executive branch of significant swaths of its functions to regulator agencies; they are meant to be ‘agents’ of the executive. At the same time, the executive branch neither has, nor (seemingly) wants to exercise, oversight responsibility for these agencies. Parliament’s oversight is transactional at best, political at worst, and never consistent. This all means regulators now stand apart from the traditional executive branch. In other words, there is a separation of regulators from the rest of the executive thereby creating the regulatory branch that is not being properly held to account by parliament.
This conclusion is not new; indeed, a 1937 presidential committee in the United States reviewing the structure of the US administration observed that the existing regulators were:
“[I]n reality miniature independent governments set up to deal with the railroad problem, the banking problem, or the radio problem. They constitute a headless ‘fourth branch’ of the Government, a haphazard deposit of irresponsible agencies and uncoordinated powers. They do violence to the basic theory of the American Constitution that there should be three major branches of the Government and only three. The Congress has found no way of supervising them, they cannot be controlled by the President, and they are answerable to the courts only in respect to the legality of their activities.” [2]
Despite the passing of nearly 90 years, this constitutional “violence” not only largely holds true; it has become entrenched. Until elected representatives take back oversight of these ‘miniature independent governments’ this ‘violence’ to our constitutional system of government, not to mention monopolistic characteristics, will continue.
Resources
[1] https://law.unimelb.edu.au/__data/assets/pdf_file/0007/5250931/MDRAN-Regulatory_Faultlines-Policy_Brief-Feb25.pdf
[2] The President’s Committee on Administrative Management, “Administrative Management in the United States January 1937”, United States Government Printing Office, Washington 1937 (retrieved from https://babel.hathitrust.org/cgi/pt?id=mdp.39015030482726&view=1up&seq=1&q1=fourth).