Regulatory capture

bealtine

Regulatory capture is a term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favour of the commercial or special interests that dominate in the industry or sector it is charged with regulating.

Regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public with only a tiny stake in the outcome will ignore it altogether. When this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of a regulatory agency so that the preferred policy outcomes of the special interest are implemented, then regulatory capture has occurred.

Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this speciality are critical of conceptualizations of regulatory intervention by governments as being motivated to protect public goods. Two often cited articles are Laffont & Tirole (1991) and Levine & Forrence (1990).

The theory of regulatory capture is associated with Nobel laureate economist George Stigler

More often than not the regulators themselves are not even aware of having been "captured"

Economic Rationale
The idea of regulatory capture has an obvious economic basis in that vested interests in an industry have the greatest financial stake in regulatory activity and are likely to be less hindered by collective action problems that might riddle those affected by regulation (like dispersed consumers each of whom has little particular incentive to try to influence regulators). As well, we would expect that when regulators form expert bodies to examine policy, this will invariably feature current or former industry members, or at the very least, individuals with contacts in the industry.

Examples
Historians, political scientists, and economists have used the Interstate Commerce Commission Interstate Commerce Commission, as a classic example of regulatory capture.

The Commerce Clause Commission was a regulatory body in the United States created by the Interslate Commerce Act of 1887, which was signed into law by United States President Grover Cleveland....

The creation of the ICC was the result of widespread and long standing anti-railroad agitation, but the Commission was later accused of acting in the interests of railroads and trucking companies. The ICC, they claimed, set rates at artificially high levels and excluded new competitors through a restrictive permitting process.

Sponge Bob

An excellent paper on the subject has been produced by a Mr Mc Mahon ( referenced in the wiki article)

http://www.iipe.org/conference2002/papers/McMahon.pdf

Mc Mahon helpfully describes 3 Levels of capture

At a first level of capture, the regulator allows the regulated to breach the law, ethic, good practice rule, moral principal or public interest duty that the regulator is responsible for upholding.

In other words the regulator refuses to follow a well grounded set of stated principles in their regulation of their sector. The Taxi Regulator in Ireland fits this description very well. They are licencing taxis at an industrial rate while knowing they have no way of checking compliance and are encouraging a race to the absolute bottom in standards .

At a Second Level, the regulator assists the regulated to avoid the regulatory consequences after the fact.

This follows level one in the sense that level one creates a MESS THAT THE REGULATOR KNOWS IT CANNOT CLEAN UP, certainly not without looking foolish .

Therefore the arse tries to justify what the elbow did ...to coin a phrase .

This would also be where the regulated sector is constantly caught blatantly evading or ignoring or thwarting stated regulations....and yet nothing is done to them . Comreg have clearly reached Level 2 Regulatory Capture .

At a deepest level of development, the ‘capture’ is so complete that the regulator may assist the regulated to defeat the regulatory regime before the fact.

Level 3 capture is very serious , the regulator by this stage is merely providing a fig leaf of regulation over the industry it seems to regulate . In fact there is no regulation as such . The tail is wagging the dog .

Only one regulator in Ireland has certainly reached this stage. That is the Financial Regulator department of the Central Bank ...and the Central Bank is the longest serving regulator in Ireland .

The Financial Regulator is only really a name for a long established department in there .

In September 2008 Anglo Irish needed a quick €5bn from the Irish Permanent to appear solvent in their annual accounts . Didn't matter where really as long as €5bn could be found , pronto, for a few days but the Permo were the ones who actually coughed up .

So Anglo went to a certain Mr Neary who was a well captured regulator at that stage ( late September 2008) . Willle Mc Ateer the then Anglo Irish Finance Director had no problem approaching their captured regulator . The story is was in the Tribune last month.

http://www.tribune.ie/article/2009/feb/22/when-anglo-official-willie-mcateer-told-patrick-ne/

McAteer told Neary the bank would be "Managing the balance sheet at year end''

In other words they had lined up a quick loan for a few days in order to appear solvent in their year end accounts .

Neary is reported to have replied, "Fair play to you, Willie".

The Regulator was delighted that an Enron scale balance sheet fraud ( relative to the size of the economy) was being planned by the Industry that he was supposed to be regulating .

Level 3 Capture has indeed made it to Ireland , of course we now have no banking system as a consequence

I strongly suspect that Comreg are at Level 3 as well .

Shortly, I fear that we shall have no telecoms industry as a consequence

corkie

Sponge Bob wrote: »

Level 3 Capture has indeed made it to Ireland , of course we now have no banking system as a consequence

I strongly suspect that Comreg are at Level 3 as well .

Shortly, I fear that we shall have no telecoms industry as a consequence

In the current climate with a Monopoly gone bust! Any over enforced policies would cripple it!

Even before it the regulator didn't have much power to start with! (Token regulator).

Regards,
J.

Sponge Bob

In terms of the incumbent then all Regulation has essentially failed because the Regulator would not impose solvency requirements on the incumbent , eg mandating that network renewal be prioritisd over feeding Biddys wallet through the ESOT or George Soroses wallet through Valentia.

In terms of mobile networks they have failed because they have not analysed excessive profits relative to comparable countries such as Finland and Sweden and Norway who are small in population terms but are territorially enormous.

Yet each of them has a better mobile service North of the Artic circle than we do in the somewhat less hostile Kerry ...and it is cheaper.

For a country with such a massive ARPU we have notably failed to remove the barriers to significant MVNO activity as well , unlike say Denmark .

The ITU unsurprisingly found this month we have the dearest Fixed line costs on the planet, 12 % higher than anybody else , and the 7th most expensive Mobile costs .

We have failed massively completely and utterly . F- and E- for Fixed and Mobile respectively .

bealtine

Sponge Bob wrote: »

In terms of the incumbent then all Regulation has essentially failed because the Regulator would not impose solvency requirements on the incumbent , eg mandating that network renewal be prioritisd over feeding Biddys wallet through the ESOT or George Soroses wallet through Valentia.

Well to impose solvency requirements would require expertise in financial regulation. We all know how "useful" Neary and Finreg were. They (un)regulated us into the midst of a major banking crisis and almost destroyed the country. So thankfully Comreg have no financial expertise. However they are following the same failed idealogical regulatory model, which will probably result in a similar crash of the same proportions.
That is the "light touch" model often touted by Rex Comb.

Sponge Bob

In Ireland we call it the 'soft touch ' model

Short Grass

Level 3 capture is very serious , the regulator by this stage is merely providing a fig leaf of regulation over the industry it seems to regulate . In fact there is no regulation as such . The tail is wagging the dog .

Having listened to Shane Ross on Drivetime this evening about the Financial Regulator (the one before Neary ) being aware of the overcharging at AIB and doing nothing about it until the AIB internal auditor forced him to by going public, reminds me that this is another "level 3" capture.
Will FF do anything about it ?? NAW!

bealtine

Sponge Bob wrote: »

In Ireland we call it the 'soft touch ' model

Brown paper bag regulation?

Tom Young

Health Warning: ALTO made a point re. Capture, to Etain Doyle former ODTR at a First Tuesday Conference in the Westin Hotel some years ago.

Regulators in-situ do not take the 'Regulatory Capture' expression well, even though there may be evidence to suggest same. I believe the context was SMS costs, which have not changed much.

Tom