How to regulate

Mark Shuttleworth is in favour of regulated capitalism. But he argues that regulation has to be done properly. Here are his guidelines.

Good regulation is very hard. Over the years I’ve interacted with a few different regulatory authorities, and I sympathise with the problems they encounter.

First, to be an effective regulator, you need superb talent. And for that you need to pay – talent follows the money and the lights, whether we like it or not, so to design a system on other assumptions is to design it for failure. My ideal regulator is an insightful genius working for the common good, but since I’m never likely to meet that person, a practical goal is to encourage regulators to be small but very well funded, with key salaries and performance measures that are just behind the industries they are supposed to regulate. Regulators must be able to be fired – no sense in offering someone a private sector salary and public sector accountability. Unfortunately, most regulators end up going the other way, hiring more and more people of average competence, that they become both expensive and ineffective.

Second, a great regulator needs to be independent. You’re the guy who tells people to stop doing what will hurt society; it’s very hard to do that to your friends. A regulatory job is a lonely job, which is why you hear so many stories of regulators being wined and dined by the industries they regulate only to make sure they don’t look too hard in the back room. A great regulator needs to know a lot about an industry, but be independent of that industry. Again, my ideal is someone who has made a good living in a sector, knows it backwards, can justify their high price, but wants to make a contribution to society.

Third, a great regulator needs to have teeth and muscle. It has been very frustrating for me to watch the South African telecomms regulator get tied up in court by Telkom, and stymied by government department inadequacy. Regulators need to be able to drive things forward, they need to be able to change the way companies behave, and they cannot rely on moral suasion to do so.

And fourth, a regulator has to make very tough decisions about innovation, which amount to venture capital decisions – to make them well, you have to be able to tell the future. For example, when an industry changes, as all industries change, how should the rules evolve? When a new need for society is identified, like the need to address climate change early and systemically, how should the rules evolve? Regulators need to move forward as fast as the industries they regulate, and they need to make decisions about things we don’t yet understand. And even when you regulate, you may not be able to stop an impending crisis. It’s very easy to criticize Greenspan for his light touch regulation on hedge funds and derivatives today, but it’s not at all clear to me that regulation would have made a difference, I think it would simply have moved the shadow global financial system offshore.

So regulation is extremely difficult, but also very much worth investing in if you are trying to run a healthy, vibrant, capitalist society.

Spot on.

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