Exploring issues about regulation – chapter review of the book Regulatory Delivery (on ethical business regulation)

In November 2019, Professor Jeroen van der Heijden reviewed briefly the book Regulatory Delivery: Introducing the Regulatory Delivery Model, Graham Russell and Christopher Hodges, editors, (2019), Hart Publishing Oxford, 504 pages. This article is the sixth of a series of brief reviews of chapters from that book.

The book sets out a ‘Regulatory Delivery Model’ that the authors describe as being useful as a map, a diagnostic tool or a predictive model to guide thinking about regulatory delivery. The model overall is made up of three prerequisites: Accountability (ch 7), Culture (ch 10) and Governance Frameworks (ch 3), and three practices: Outcome Measurement (ch 13), Risk-based Prioritisation (ch 16) and Intervention Choices (ch 20).

Chapter 22 – Ethical Business Regulation (EBR) –is associated both with the Culture prerequisite and the Intervention Choices practice element of the ‘Regulatory Delivery Model’ on the basis that how any entity operates and interventions regulators make are profoundly affected by its culture.  The culture of a business (whether it adheres to an Ethical Business Practice (EBP) approach, or not) will impact on intervention choices made by a regulator.  A regulator’s ability to choose interventions that reflect and support EBP also relies on it having an appropriate culture. Thus, EBR relies on regulated parties’ commitment to EBP, and regulators’ commitment to EBR.

EBP and EBR are based on research relating to how humans think and act. Behavioural psychology findings indicate that most human beings aim to do the right thing and want to be seen as doing the right thing – although they break rules and then rationalise that their actions are ethical. It also suggests people won’t break rules if they perceive a strong chance of being caught. This suggests that strategies to maximise compliance should emphasise ethical values, not compliance with rules; and transparent checking of ethical practice. It is also recognised that strong sanctions are necessary for those who have behaved unethically – although sanctions do not necessarily affect future behaviour.  Significantly, strong sanctions imposed on people who believe they have behaved ethically will create resentment and may reduce ethical and compliant behaviour. The chapter promotes the need for a regulator, and a business employer, to have a wide range of intervention options to respond proportionately to the ethical motivation and understanding of someone who has broken a rule. 

Developments in regulatory practice that encourage regulators to support regulated parties to comply and grow, underpinned by clear information, guidance and advice are identified as potentially being more effective in achieving compliance. It is also clear that where regulated parties do not ‘do the right thing’ and do not follow ethical business practices, redress should be sought. 

Relationships and trust between regulators and regulated parties involving mutual engagement and shared outcomes are said to maximise the delivery of desired outcomes.  An example, the Primary Authority scheme – based on partnerships allocating responsibilities and expecting that issues can be raised and answered without allocating blame – is described as an excellent example in this area.

The chapter provides an EBP and EBR framework showing there are a multiplicity of forces that shape an organisation’s culture and it is noted that the initial formal step of creating EBP within a regulated organisation has to come from the organisation itself – it cannot be imposed from the outside.  However, a regulator’s response to and engagement with a regulated party can support, or not, its focus on EBP.

This chapter covers familiar territory for regulators in New Zealand who have embraced concepts such as responsive regulation and the links between behavioural insights and regulation – matters explored by Professor van der Heijden in his Regulatory Frontlines blog.  It certainly reinforces the importance of thinking deeply about and strengthening the relationships regulators have with regulated parties; and the importance of using a wide range of tools to achieve compliance – but more importantly support ethical behaviour,  which is more likely to be successful in improving desired outcomes.