The Role of the Regulators
Be it the Central Bank of Sri Lanka, Securities and
Exchange Commission of Sri Lanka, Insurance Board of Sri Lanka, Consumer Affairs Authority
or any other regulatory body, their main role, simply, is to look after the
public interests or the interests of the individual consumers of the regulated
industry’s products, i.e., Financial Products, Securities, Insurance Products,
etc. In academia, this is
identified as the “public interest” hypothesis which conceives that government
regulation benefits consumers of goods and services. The contrary argument is
the “Capture” hypothesis which theorize that producers of goods and services
receive net benefits from government regulation.
Capture Hypothesis
A theory of regulatory behavior that predicts that
regulators will eventually be captured by special interests of the industry
being regulated. In the Capture Hypothesis it is argued that regardless of why
a regulatory agency was set up, eventually special interests of the industry it
regulates will capture it. This happens when the regulators become key
personnel at the firms they are entrusted with regulating or personnel from industry become regulators.
Is this a problem found only in Sri Lanka? No. It has
not been a phenomenon seen only in Sri Lanka. Across the globe there are
instances of regulatory capture where questions were raised as to how effective the
regulatory bodies are in protecting the interests of the public. It is also
reported in media that regulatory capture was responsible even for the recent
financial crisis.
The other question is
whether the prevalence of this, of regulators ending up at entities they used
to regulate, is bad for the Sri Lankan markets or not? Well this is a question that has not been
answered objectively by anyone (as far as I know) and neither do I am in a position to answer this
question. However, a bit of news analysis will definitely show that this has
not been good for the markets either. For instance, the resigning of SEC DG
Malik Cader, SECchairperson’s subsequent resignation,
Tilak's resignation as SEC chairman, etc.
While it is not right to say that all these things were as a result of
regulatory capture alone (rather as a result of a plethora of things), I believe that
a proper study will reveal that there was a certain element of regulatory
capture that was responsible for some of these issues.
Are they not supposed to work!
The other question is; are these regulators not supposed
work after they complete their respective tenures with the regulators? My belief is that they shouldn’t be joining the entities that they used to regulate,
at least for certain period of time. (there would be a question raised by
anyone against this on the basis that they know better the industries they
regulated and how are they going to work for a totally different sector which
they don’t know!!!)
The bottomline
The economic rationale for regulation is that it offers
benefits; albeit not measureable. These benefits from a capital market
perspective may, broadly, include efficient markets, efficient capital flow,
investor protection, etc. Potential beneficiaries are investors, issuers and
other market participants. However, these benefits don't come free, they incur a cost. End of the day the taxpayers finance the regulatory agencies
and hence they should be benefiting from it rather than a select industry
group.
Interesting blog
ReplyDeleteThanks Alpha 123, Interestingly enough there was a counter argument to the earlier article (http://www.ft.lk/2014/07/16/why-ex-regulators-should-stay-away-from-private-banks-who-is-who-and-why/) and the new article can be found here: http://www.ft.lk/2014/07/16/why-ex-regulators-should-stay-away-from-private-banks-who-is-who-and-why/
DeleteHowever the point being that the defender seems to completely miss the point here and comes to save his known family!!!