Not only do I love my work in the field of insurance regulation, but I have learned that I am also fascinated by the various theories of and approaches to regulation. A true geek!
And it is an exciting time for a student of regulation: health care, financial services reform and off-shore drilling at the top of the list, but just below are many more areas being re-examined. What strikes me is how rarely new regulatory systems are based on models that work—instead they mainly seem to be reactions against what most recently has not. I often get the impression that the process is one of saying "Well, that didn't work. Let's try this." Whatever "this" is. At least it is not "that."
Two recent articles struck me on this point. In Friday's Financial Times, Lawrence Mitchell wrote a column entitled "America needs regulators that fight to win." He criticized the SEC for accepting the $550 million settlement with Goldman Sachs. Mr. Mitchell states: "In its founding legislation, Congress empowered the SEC both to protect investors and ensure a fair and efficient market. The settlement may have accomplished the first goal. But it also showed the SEC's continuing failure to take its wider regulatory role in a more aggressive direction." Mr. Mitchell criticized the SEC for not achieving the cultural change he, and many others, believe is necessary on Wall Street to avoid another crisis. But how exactly does an agency change a larger culture? Is culture change—even a cultural change in the industry it regulates—really the role of a regulator? Mr. Mitchell postulates that a refusal to settle, at least on these terms, and instead litigation would have advanced that goal of culture change - it would have sent a clearer message of what is expected.
Another regulated industry that I follow is also raising issues around the appropriate regulatory framework. In the AmericanLawyer.com's July 22, 2010 edition, Anthony Davis wrote "A New Approach to Law Firm Regulation." He argues that current regulation of lawyers is out-of-date and asked the question point blank: "How should a new regulatory system be structured?" He answers that question this way: "What is needed is a single, national regulator for the U.S. legal profession, empowered to develop and enforce rules that encourage efficient, value-based delivery of legal services and enable lawyers and firms to operate on a level footing with their foreign competitors." On the question of who the national regulator should be he indicates that it could be the U.S. Department of Justice or the Federal Trade Commission or a new agency. He calls for a local presence in addition to the national regulatory body. He states "How this local enforcement structure would evolve, and what relationship, if any, it would bear to the current state-based disciplinary system, are questions for another day."
I don't expect anyone to be able to answer definitively the myriad of questions related to how day-to-day regulation will work at the beginning of a call to change. But I do think it needs to be a significant part of the larger discussion. As we reform and create new regulatory frameworks in a variety of industries, including insurance, do we want regulators who "fight to win" as Mr. Mitchell calls for? Or do we want regulators that "encourage" and "facilitate" the businesses they regulate as Mr. Davis advocates? Are these even the right questions to be posing?
The problem we face as a country of regulators and regulated businesses is that we vacillate. First we want encouragement and facilitation to encourage business growth, employment, etc. and then when it appears as though that might have gone too far and there's a crisis, we want someone to step in and bring a more adversarial approach, with a winner and a loser.
I think the goal of regulation should be regulators who are extremely knowledgeable about the industry they regulate and the challenges it faces, while at the same time having a keen understanding of the reasons why the industry is regulated in the first place. They need to know when a light touch is needed, and when a sledgehammer should be lowered. Regulators need to be willing to listen and work hard to be consistent, fair, and perhaps most important, transparent. Many individual regulators meet those standards. As with any institution, the challenge comes when individuals become a group. Standards become harder to establish and maintain. Communication and consistency become issues. Turf wars and credit/blame games can develop.
But from my perspective, in the discussions of reform, too little attention is paid to those individual people who make up the larger regulatory agency. There is little discussion of how significant their role is in creating the whole regulatory environment. In my opinion, the most important aspect of creating an effective regulatory body is the training and empowerment of the individuals within the agency. Even more than the laws and regulations they have to work with, having competent, empowered and confident staff at the agency, in my experience, leads to the most effective regulation. As all the new laws and regulations come into effect, I will be looking to see if there are corresponding efforts inside the agencies charged with enforcing them to really grow the staff into their new responsibilities.
Instead of looking at agencies as a whole, I think reform efforts need to look to the individuals within those agencies to be sure that they understand the mandates and the resources they have at their disposal and the scope of their abilities to act within the mandates and resources. Those individuals need to have their expertise recognized and valued where it exists. Training and opportunities for professional growth need to be offered where the expertise does not yet exist.
If we want effective regulation of any regulated industry, we need effective regulators. On a day-to-day basis, regulators are individual people, not large agencies. That is where the emphasis should be placed. That will result in more effective regulation. That will result in more strict enforcement happening when it is called for and more facilitation when that is appropriate - because the knowledgeable and trained staff will see and understand the difference.
And, most of all, they will care. Demoralized staff are not likely to be "effective" no matter what laws they have to work with. Unless those people calling for change in regulation look at regulators as individual and real people and focus there, I think real reform is unlikely.
History has shown that merely changing laws and regulation results in the regulatory pendulum continuing to swing: "fight to win" or "encourage" and "facilitate," and back and forth we go. We can change the laws, we can change the agency's charge, but until the emphasis is placed on the people who carry those out, I don't hold out a lot of hope for any of the regulatory reform packages that are put forward. With that emphasis, legislative changes often don't need to be dramatic. Hold the heads of regulatory agencies responsible for how knowledgeable and skilled their staff members are. Hold them responsible for making sure that their agencies are filled with experts in their fields and that individual expertise within agencies gets recognized and heard, when the expertise brings good news and when it brings bad. That will increase the quality of regulation.
At the end of the day the success of regulation for the regulated industries and for society lies in the hands of individual regulators. Let's focus there and make real change.
