Regulatory Relations
Rupert Brown

If you were to ask a member of the general public how a regulatory body is funded, they will probably scratch their head before replying that they think it is some sort of state-funded grant. By Rupert D.E. Brown, CTO at Evidology Systems.

In fact, regulators can be funded via a number of means, the most common of which is a levy on all the entities in their domain of control. This levy approach is probably the most opaque to ordinary citizens, and further arouses the suspicion that higher membership fees equal less oversight. Several academic studies of the banking sector further support this suspicion.

While financial services have attracted the most scrutiny, the same issues of power and influence pervade all regulated business domains, whether in the public or private sector.

It might be argued that investor bodies such as pension funds should have a keen interest in the probity of their assets under management, and while the advent of ESG legislation should improve things, the focus is often on the regulated entity, not the regulator.

How then can the public be actively engaged in keeping the regulators that are supposed to protect them on their toes? The GDPR Enforcement Tracker has demonstrated that it is impossible to compare regulatory strategies and successes across countries for a single problem domain, so trying to provide a meaningful measure across all regulatory bodies in a single nation poses the same problem, if not worse.

Another paradox that needs to be resolved is whether good regulation actively limits the number of regulated entities in the domain or enables growth. The lessons of the energy markets across the world in the light of the war in Ukraine – as with the financial crash of 2008 – would suggest that capping the number of participants and setting high capital and liquidity barriers to entry is generally the better strategy.

Do we therefore need to have a funding model for regulators in non-financial domains that mimics the notions of capital adequacy? Should the likes of Google and Microsoft pay per ‘petabyte under management’?  Would media companies pay regulators per hour of streamable content they host?

There are probably many similar models that can be applied in engineering-based sectors, but would they work in pharmaceutical or other sectors with significant human variability factors and long research lead times before public regulatory needs?

Spending the money

Now let’s turn to the other side of the balance sheet, i.e. spending. What do regulators need to spend money on?

First, there is the wage bill. Regulators need to attract and retain talent that is at least as good as the market participants in their domain and be able to play their masters’ political system, the judiciary and the media.

Then there is the infrastructure that they use: premises, systems and services contracts. These also need to be at least benchmarked against both their specialist domain and other regulatory bodies. In this new era of hybrid working, particular attention needs to be paid to the public perception of expensive, dedicated headquarters buildings which can probably be shared among multiple regulatory bodies.

Away from the day-to-day operating costs, there then needs to be dedicated funding for exploring/trialling new areas of regulation that are most visible in many of the ‘sandbox’ initiatives in the financial reporting area of regtech.

Perhaps the most vexed question is how much financial contingency individual regulators should carry to mitigate against legal costs/losses, or whether this risk should be carried by central government.

It should be reiterated that both sides of the fiscal equation need to be made more transparent to both the market participants and the wider public that regulators serve. As well as the dry balance sheet numbers, there needs to be some threshold definition of what ‘good’ looks like (and, of course, ‘bad’ as well).  

In the current economic climate, specific binding of regulatory performance to the rate of inflation in each managed sector would seem to be a measure that can be easily explained to consumers.

Staff morale and turnover data also needs to be surfaced for wider scrutiny. There have been persistent rumours in the post pandemic era that several regulators are struggling to retain talent as both business and political leaders have switched to survival mode to ride out the current inflationary and supply chain pressures.

Clearly there are no simple answers to improving the operational transparency of regulatory bodies, but I think there is significant scope for standardisation of how regulatory fees are derived and calculated as well as explaining where that money then goes.

Sustained public communication and sector engagement by both regulators and their political masters is key to making sure that there is confidence in all markets, especially in these difficult economic and geopolitical times.

A Speakers’ Corner is an area where open-air public speaking, debate and discussion are allowed. The original and most noted is in the north-east of Hyde Park in London.