The ‘smart regulation’ dimension of the ‘smart economy’ has not been much discussed. Conceived of properly and implemented well smart regulation offers a way for governments to better understand and harness the different ways of mixing instruments and actors to get regulatory tasks done. It invites all stakeholders to think outside the usual boxes and then frequently re-visit institutional choices to fine tune regimes where outcomes are inappropriate.
In the Government’s White Paper Building Ireland’s Smart Economy ‘smart regulation’ was linked to broader public sector reform. The smart regulation measures were described in the following way:
‘Reduce the administrative burdens for citizens and improve the quality of regulation through tools such as e-government, regulatory impact analysis and by enhancing the accessibility of the statute book.’
In essence this usage is consistent with that of the Canadian Government’s 2004 Smart Regulation programme which adopted a business usage of the acronym SMART – Specific, Measurable, Attainable, Realistic, Timely. The best examples of SMART regulation, in this sense, involve reviewing proposed and existing regulatory rules to ensure they are proportionate to the aims sought and targeting enforcement more effectively at higher risk areas of activity. These measures are the primacy focus of Better Regulation programmes adopted in Ireland and in most OECD member states.
An alternative usage of the term smart regulation, widely associated with researchers at the Australian National University (notably Gunningham and Grabosky’s well-known Smart Regulation (OUP, 1998), transcends sterile debates about whether we need more or less regulation. Rather it involves a recognition of the limits to the knowledge and capacity of governments for controlling social and economic life, together with an acknowledgement that other actors, both economic and social have important resources and knowledge relevant to regulation. It has resonance with the ideas put forward in Thaler and Sunstein’s recent book Nudge (Yale, 2008), that in some settings gentle measures to influence choices in particular directions may be more effective than mandatory rules.
The tasks within a regulatory regime involve the setting of standards, norms or rules, feedback on compliance with the norms and some mechanism for steering deviant behaviour back towards the norms. Few regulatory regimes accord to a classical model in which legal rules are monitored and strictly enforced by a regulatory agency. Non-state actors are frequently involved in one or more of the tasks and mechanisms involved can extend beyond legal enforcement to include controls rooted in market and social behaviour. For example whilst there is legislation governing misleading advertising, many of the norms governing behaviour of advertisers are set by the private Advertising Standards Authority of Ireland. The innovative plastic bag levy is largely enforced by retailers who collect the sum of money which has substantially contributed to reducing consumer appetites for consumption of plastic bags.
As the scale and causes of the financial crisis became apparent in September last year it was reported that President Sarkozy linked self-regulation to laissez-faire and declared that both were finished. His remarks were widely interpreted to suggest a need to ratchet up classical command and control type regulation – a response reminiscent of the US response to the Enron collapse with the Sarbanes-Oxley Act in 2002. President Obama was possible signalling a more nuanced approach (smart regulation and nudges) when he recently appointed Cass Sunstein (see above) to head the US Office of Information and Regulatory Affairs.
It is possible that, to the extent that the sources of the financial crisis were governmental, they lay in an excessive expectation of what could be achieved by regulatory authorities. (It is only half in jest to suggest that the phrase ‘Regulated by Financial Regulator’ is today taken as a warning rather than a reassurance). In practice a significant proportion of the regulatory activity in the financial sector is and will remain non-governmental in character. Key standards for financial reporting are set by the International Accounting Standards Board. In the area of money laundering the limits to government monitoring are recognised by the imposition on banks and professional services firms to monitor and report suspicious transactions. Credit rating agencies have a key role in monitoring and reporting on the financial conditions of both firms and sovereign governments. The global financial crisis reinforces the interdependence of the state with markets. Smart regulation displaces the hubristic idea that governments can control markets with the suggestion that governments should observe and seek to understand better. There are circumstances where governments and law may be the most effective means to constitute or regulate social or market behaviour. In other circumstances it may be more appropriate to acknowledge that the capacity and knowledge lies elsewhere.
Smart regulation is simultaneously more modest in what can be achieved through legislation, government departments and agencies, but more ambitious in terms of the potential for harnessing the capacities not only of businesses but also other key stakeholders such as consumer and employee groups. It recognises that setting of norms, oversight and enforcement are not state monopolies. There are national and international non-government regimes which set stringent norms in such areas as environmental protection and employment rights, and these rules are often overseen by other businesses (through supply-chain contracts), through third party certification bodies, through gatekeepers (those with capacity but not necessarily the interest to enforce) such as banks and insurance companies, through the whistleblowing activities of employees and unions, and through the reputational effects of markets (both positive where consumers prioritise compliance with norms in areas such as fair trade or environment and negative where publicised behaviour leads to boycotts).
The balance between state, market and community in regulatory governance is not simply about effectiveness in terms of outcomes, it is also about promoting legitimacy. A key government role is to use its unique capacities to align public and private values. As has been widely observed a good deal of the trust required to operate such smart techniques as principles-based regulation over financial markets (under which market actors develop and apply a good deal of the detailed rules) has been called into question by recent events. A greater role for business actors in setting and enforcing standards may be more appropriate where the interests of business are more-or-less aligned with some version of the public interest generally. The current financial crisis has revealed that financial institutions cannot always look after even their own interests. It has also demonstrated that the banks are, to a degree, ‘hostages of each other’ (to borrow a phrase from Joe Rees’ well known study of self-regulation of the US nuclear power industry) in the sense that the failure of one adversely affects them all.
A smart solution does not necessarily involve cracking down with detailed rules and stringent agency enforcement. Aggressive medicine can, after all, kill the patient. Smart regulation asks who has the knowledge and capacity to promote decent standards, to monitor and to correct deviations. The role for government in this new thinking is neither total nor negligible, but it is likely to depend on the knowledge and resources of others.