The insidious regulatory challenges of the 21st Century

In my role as Chair in Regulatory Practice, I am often asked what I think are the biggest challenges for regulators in the critical decades that lie ahead. The expectation is that I will then discuss challenges such as disruptive technology, climate change, or even the next pandemic. These are important, but I do not consider them the biggest challenges for regulators in the 21st Century. To speak with former US Secretary of Defense Donald Rumsfeld, they are known unknowns (we know that we do not know everything about them).

The biggest regulatory challenges that lie ahead of us are insidious. They are unknown unknowns, or at best, we are only beginning to realize that they are substantial regulatory challenges (they are unknown knowns). But to understand what the insidious regulatory challenges of the 21st Century are, we have to go back into time because many of the challenges that lie ahead have their roots in the past.

How regulation became the modus operandi for governments

Over thousands of years, the type of regulatory governance that is now dominant in the Western world has developed towards systems of rules that impose obligations on behaviour and penalize nonconformance (or reward conformance). Such rule systems help to reduce uncertainty and make life more predictable. By the end of the 19th Century, governments in the West had embraced regulation as their dominant administrative approach to steer society, achieve desirable public goals, and allow for economic development.

Ironically, whilst government-led rule systems had allowed for significant economic development up to the 20th Century, it was ongoing industrialization and globalization that began to push their limits. New economic and industrial opportunities created new risks, calling for ever more government-led regulation. Also, society progressively called for social regulation to ensure that economic development would benefit all and for environmental regulation to ensure that the negative externalities of industrialization would be kept at bay.

These circumstances resulted in highly complex rule systems that, by the 1980s, policymakers and industry representatives began to single out as raising barriers to economic development. At the same time, liberally oriented interest groups began to challenge governments for being captured by the exact industries they sought to regulate.

Major regulatory reforms since the 1980s

Various regulatory reforms were attempted over the last four decades to overcome the (assumed) problems of overregulation and regulatory capture. It is relevant to acknowledge that reforms were sought at all levels of regulatory governance. First, reforms in the philosophy of regulation. At this level, we see aggressive calls for deregulation, cutting of ‘red tape’, and reductions in business compliance costs. This has resulted in, among others, a shift from prescriptive regulation to performance-based regulation that (in theory) allows businesses to find cost-effective compliance solutions.

Second, reforms in the development of regulation. At this level, we see increased involvement of targets and beneficiaries in regulatory design through deliberative processes. This has resulted in, among others, a shift towards self-regulation by businesses (often within the boundaries of a government-led rule system) and a shift towards ‘beyond compliance’ rule systems such as the Forrest Stewardship and Marine Stewardship certification of products. The latter are typically developed by collaborations between interest groups, firms, and (sometimes) government, and only differ from governmental regulation in that they are not backed by the force of law.

Third, reforms in the delivery of regulation. At this level, we see an expansion of regulatory tools and more utilitarian ways of applying them. This has resulted in, among others, a shift from deterrence-oriented regulation to regulation informed by behavioural insights that address moral or social obligations of targets to comply as well as their ‘irrational’ biases. It has also resulted in a shift to risk-based regulation to systematically allocate limited regulatory resources and ‘pick the biggest regulatory problem and fix it’.

Insidious regulatory challenges of the 21st Century

By the early 2020s, it has become clear that many of these reforms have not delivered on their promises. Deregulation often results in regulatory voids, which calls for reregulation. Performance-based regulation is often too daunting for those not at the cutting edge of their industry, and they call for deemed-to-satisfy (i.e., prescriptive) solutions. Even within the boundaries of rule systems, self-regulation has a track record of causing more harm than doing good (think of the Global Financial Crisis, the Deepwater Horizon oil spill, and so on). Finally, risk-based allocation of regulatory resources puts regulators in a difficult reputational and political position when a mathematically low risk materializes and causes significant disruption (think of the COVID-19 pandemic).

#1, Reforming regulatory reforms

Despite growing evidence that various of these ‘first order’ regulatory reforms have not delivered on their promises, we witness ongoing calls for more reforms, more deregulation, and a more hands-off government. This is the first insidious challenge for regulators in the 21st Century: It is not often appreciated that the challenge no longer concerns reforming traditional top-down, intrusive, government-led rules systems (that have developed incrementally over thousands of years). The challenge now is reforming earlier regulatory reforms. These ‘second order’ regulatory reforms call for a logic that reaches beyond the single dimension of deregulation, and a reappreciation and understanding of how rule systems in their basic form reduce uncertainty, make life more predictable, and are required for economic stability and development.

#2, Retrofitting regulatory real estate

Today’s rule systems result from rapid regulatory growth (following the traditional model) in the early 20th Century and patches and (relatively) quick fixes implemented in various reforms since the late 20th Century. Yet, just like rapid development and patching up is not a viable long-term solution for normal real estate, it neither is for our regulatory real estate. And, just like normal real estate, we cannot knock down our rule systems and start anew simply because we are actively using them and have no direct replacement available. We have no alternative but to retrofit our regulatory real estate whilst using it. This calls for long term regulatory planning, regulatory theories of change (ToC), and addressing complex challenges that have hampered deep regulatory reform so far—such as phasing out infinite property rights, requiring sunset clauses in regulation, and increasing the public accountability of regulatory agencies’ leadership.

#3, Regulatory (un)wokeness

Those working on regulatory reforms are often ‘regulatory woke’. They are aware of the variety of regulatory strategies and tools available, the motivations of targets to (not) comply, and what public or private organizations to involve in enforcement. They will recognize terms such as ‘responsive regulation’, ‘nudging’, and the ‘swinging of the regulatory pendulum’. To them, traditional, top-down, intrusive, government-led regulation is but one of many options to choose from. Yet, those who call for regulatory reform are often ‘regulatory unwoke’. To them, the traditional model is the model of regulation; a model that is embedded in our societal awareness (it has been around for thousands of years). In addition, 40 years of aggressive calls for reform of that model from the right (to reduce regulatory burden) and left (to overcome regulatory capture) have made people not look favourably at regulation and regulators. Aligning these diametrically opposed understandings of what regulation is and what it can be is a huge challenge.

#4, Embrace regulatory targets’ heterogeneity

One-size-fits-all regulation often means one-size-fits-none in practice. The rapid growth of detailed regulation in the first half of the 20th Century and several reforms since the 1980s were driven by a desire to forego one-size-fits-all regulation. Yet, targets of regulation are still treated as if they are homogenous cohorts. They are, however, heterogeneous. Any cohort of targets includes groups of laggards and groups of leaders and groups in-between. Regulation is typically developed to be effective in pushing the performance of laggards to an accepted bottom line. That model provides little rewards for leaders for achieving ‘beyond compliance’ behaviour (which could help regulators developing the future bottom line), nor does it provide incentives for groups in-between to move beyond the bottom line. Another challenge is to embrace the heterogeneity in cohorts of targets. Leaders could be rewarded through voluntary programs, in-between groups could be nudged to do better, and so on.

#5, Optimal rules systems are configurations of necessarily sub-optimal parts

A final challenge to tackle for regulators (and through them, their targets and beneficiaries) is to come to terms with the truism that an optimal rule system is a configuration of necessarily sub-optimal parts. Past regulatory reforms have tried to optimize parts of rule systems. They have sought to make rule systems more cost-effective, or more transparent, or more inclusive for stakeholders, and so on. However, at the systems level these partial optimizations clash. Being optimally transparent requires resources and asks for a sacrifice of optimal cost-effectiveness. Until regulators (and their targets and beneficiaries) stop pursuing optimization of the parts of rule systems, regulatory governance will remain an institution of ongoing internal conflict at the system level. Regulators must make daunting trade-offs between competing public values and in doing so pursue a vision of rule systems that make a larger contribution to societal well-being than any sum of their (suboptimal) parts could.

Looking forward

In sum, the regulatory challenges of the 21st Century that worry me are the type of insidious ones that I have discussed here. Arguably, the five I touched on were, until recently, unknown unknowns resulting from the regulatory reforms that started in the 1980s. Now they are, at least, unknown knowns (we only begin to realize that we know they are substantial regulatory challenges). This gives regulators a moral obligation to respond to them and keep an eye out for other insidious regulatory challenges whose existence we do not even yet realize.

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