Getting to the essentials of regulation with Harvard Professor Malcolm Sparrow

Regulation is one of the most complex tasks of public management, requiring high levels of technical knowledge, as well as good judgment and political nous.

Nicole Pyner, the Senior Manager (Legal & Policy) Markets at the Australian Securities and Investments Commission (ASIC), has spent 20 years working for ASIC, after beginning her career as a lawyer. Her division focuses on regulation of stockbrokers and stock exchanges – a technically complex area.

“The difficulty of this area is the complexity of the job and the businesses we regulate. There is a strong need to understand its intricacies and where the potential issues might be. The organisations we regulate are also likely to push back against regulation, and we need to be prepared for that,” she said.

Ms Pyner was first exposed to Harvard Kennedy School Professor Malcolm Sparrow’s ideas early in her career when she was new to the field and “just getting her head around the separate bunch of skills needed to be a regulator”.

Professor Sparrow is a globally recognised authority on the regulatory craft and harm-based regulation, who has worked to improve the performance of regulatory, enforcement and compliance officials across the world.

Ms Pyner has attended two of Professor Sparrow’s ANZSOG workshops, as well as long term in-house work he has done with ASIC, and is a devotee of his approach to the complex area of regulation. She credits Professor Sparrow with inspiring her to think more strategically about her work.

“The best thing about being introduced to Malcolm Sparrow’s work is that it gives you a lens to think strategically about these issues, and to look at the job beyond ‘the next file on the pile’. You really need to think strategically when you are in a complex and politically-sensitive area of regulation.”

Professor Sparrow has a strong interest in Australia and Aotearoa-New Zealand and has presented ANZSOG workshops on regulation for more than a decade.

He has a five day online workshop, Managing regulation, enforcement, and compliance (9-13 November), a two (half) day online workshop, The Modern Regulator (5-6 November), and a free webinar on the Fundamentals of regulatory design on 27 October 2020. 

Using all your tools to minimise harm

One of Professor Sparrow’s key ideas is the concept of “harm-based regulation”, which he describes as ”the idea of acting to minimise specific risks or harms, rather than relying on the assumption that existing functional programs and good process-management will necessarily take care of them all”.Professor Sparrow says that, just as real world problems come in awkward shapes and sizes that do not match existing regulatory structures, regulators need the fluidity to organise themselves around specific risks without damaging their performance of core functions.

Ms Pyner said that the concept of harm-based regulation was highly relevant to ASIC and the organisation spent a lot of time “trying to be very precise about what we class as harm, and purposeful about what we need to address”.

“For example, a few years ago there was a concern about High-Frequency Trading, some of it media-driven but also from genuine harm in the USA. So we did our own mathematically-based research which showed it was not a major harm in Australia. Because of that we were able to take a better approach to regulation and use of resources. The fact we were confident in our mathematics made it easy to address perceptions that we were not tackling a risk.”ASIC was subject to criticism from the Hayne Royal Commission into Financial Services for its lack of punitive action against persistent wrongdoers, and Ms Pyner says the organisation has since adjusted its approach.

Professor Sparrow talks about the “regulatory pendulum” – the tendency for governments to swing from trusting and cooperative postures back to adversarial enforcement-centred strategies after negative events.

Ms Pyner said that about ten years ago there had been a lot of criticism around how intrusive ASIC had been in their enforcement powers because they were using them more than some of their regulatory peers, and that there had been consistent moves before the Royal Commission to “get rid of red tape”.

“There is a continual effort to get the balance right between the costs of intervention and protecting the public interest.”

She said that another thing that Professor Sparrow reminds regulators to do is to make sure “you use the full range of tools at your disposal to prevent harm”.

“Malcolm is good at getting people to look at the whole regulatory landscape and how we can identify and address harms. This takes a certain amount of guts because you need to be able to stand up to media and political pressures”

“At ASIC we have a lot of legal powers – criminal prosecution, civil penalties and injunctions – but there are other things we can do,” she said.“We’ve set up the Moneysmart website to give people good advice about managing money, so that they have access to the information they need to make good decisions. This can prevent harm in the same way as shutting down bad financial advisors.”

Good regulators think strategically

When asked what makes a good regulator, Ms Pyner said the key was thinking strategically and developing a strong sense of regulatory judgment.“You can’t afford to just have one way of dealing with an issue and apply that without a lot of judgment. Even if things have worked in the past new situations often have nuances that mean the old approach won’t work as well. You need to step back and examine the problem and decide what tool to use,” she said.

She said that Professor Sparrow’s ANZSOG workshops were an eye-opener for people new to regulation or new to senior positions, and would give them a more sophisticated and strategic way to do their job.

“He gets you to think about how you use discretion – is it fair? Is it appropriate? He also covers the use of data, which he has been talking about well before other people.

“He also gets to questions about media management and crisis management that regulators need to understand. It’s important to start to think about those issues early in your career.”

She said that for senior people the workshops could also reinvigorate their understanding of their work, and give them a sense of how their work fits into the bigger picture of the organisation.

“Even if you don’t use his work in a formal way, the course gives everyone a common language and sense of understanding of the issues,” she saidThinking strategically and focusing on harm-based regulation are important for regulators because their work is so difficult, and no approach will satisfy everyone.

As Professor Sparrow says: “There is always inherent conflict in regulatory roles. If, on whatever issue you’re dealing with, there was a solution available that would make all stakeholders perfectly happy, then the chances are that this issue doesn’t really need regulation.”

Learn from Professor Sparrow online

Managing regulation, enforcement, and compliance, delivered online 9-13 November, will help regulators develop a clearer understanding of the resources and authorisation needed to run effective risk-control, solve problems and manage compliance operations.

The modern regulator, delivered online on 5-6 November, will provide regulators with the opportunity to learn about developments in regulatory strategy – the ideal workshop for regulators grappling with the challenges of effective risk-control.

Professor Sparrow’s free webinar with ANZSOG/NRCoP, Fundamentals of regulatory design (27 October 2020) will demystify the various prescriptions for regulatory conduct and explains what it might mean to be a risk-based regulator.

Two recent ANZSOG National Regulators Community of Practice webinars have also touched on Professor Sparrow’s work, and the issues around regulatory independence: Regulation Trust and Social Licence with James Shipton, and Inside/Outside with Peter Shergold and Graeme Samuel.

You can watch the regulators webinars on our Youtube channel and find out more about the National Regulators Community of Practice on our website.