Complexity and Better Financial Regulation

NAECHarald Stieber, Economic Analysis and Evaluation Unit, DG FISMA, European Commission

The financial crisis of 2007/08 was not caused by complexity alone. It was caused by rapidly increasing financial leverage until a breaking point was reached. While the mostly short-term debt used for leveraging up consists of “run-prone contracts“, the precise location of that breaking point had to be discovered in real time and space rather than in a controlled simulation environment. Also, the complex dynamic patterns that emerged as the crisis unfolded showed that little had been known about how an increasingly complex financial system would transmit stress. The sequence of markets being impacted and the speed of risk propagation across different markets and market infrastructures was not known beforehand and had to be discovered “on the fly”. Our ignorance with respect to these static and dynamic properties of the system reflects deep-rooted issues linked to data governance, modelling capabilities, and policy design (in that order).

From a policy perspective, the crisis revealed that several parts of the financial ecosystem remained outside the regulatory perimeter. As a result, the public good of financial stability was not provided any longer to a sufficient degree in all circumstances.  However, the regulatory agenda that followed, under a principles-based approach coordinated at the level of the newly created G20, while closing many important regulatory gaps, also created increasing regulatory complexity.

Regulatory complexity can also increase risks to financial stability. Higher compliance cost can induce avoidance behaviour, which makes financial regulation less effective as regulated entities and agents will engage in regulatory arbitrage as well as in seeking to escape the regulatory perimeter altogether via financial innovation. Until recently, at least the largest financial institutions were considered to “like” regulatory complexity.

However, the perception of complexity in the financial industry is changing. Complexity cannot be gamed any longer as compliance cost and risk of fines have increased. One of the clearest statements in that direction came in the form of a letter from financial trading associations that we at the European Commission received (together with all main regulators) on June 11 2015. In their letter, the associations called for coordinated action in the area of financial (data) standards that would reduce complexity to a level that could again be managed by the sector.

The European Commission’s Better Regulation agenda has at its heart the principle that existing rules need to be evaluated in a continuous manner to assess their effectiveness[1] as well as their efficiency[2]. Under this agenda, the Commission launched a public consultation in 2015 calling on stakeholders to provide evidence on 15 issues with a strong focus on the cumulative impact of financial regulation in place. The purpose was to identify possible overlaps, inconsistencies, duplications, or gaps in the financial regulatory framework which had increased considerably in complexity. The area of (data) reporting emerged as a major area where responses pointed to important possible future gains in regulatory effectiveness and efficiency.

Regulatory reporting has seen massive changes as the lack of relevant data at the level of supervisory authorities had been identified as a major source of risk during the crisis. Especially, legislation in the area of financial markets such as the European Market Infrastructure Regulation (EMIR), but also MiFID/R, employed a different approach to regulatory reporting compared to existing reporting obligations for regulated financial institutions (e.g. COREP, FINREP).  EMIR puts the focus on the individual financial transaction (of financial derivatives traded over-the-counter rather than on a regulated exchange), with reporting at the most granular level of the individual financial contract. Reporting under EMIR started to be rolled out in several phases from February 2014 and is still ongoing, starting from the most standardized contracts and continuing to the least standardized ones. This approach is extended to a broader class of instruments under MiFID/R.

This granular approach to regulatory reporting holds tremendous promise from a complexity science perspective. It could, at some point, allow the mapping of the financial ecosystem from bottom-up, as well as further the development of a Global Systems Science policymaking process. However, to arrive at more evidence-based, data-driven policies, data governance, and more precisely financial data standards, will have to be adapted to the increasingly granular data-reporting environment.

Data governance requires robust financial data standards that keep up with technological change. We see a few precise implications at this stage what standards need to do in that respect. Financial contract data is Big Data. Financial data standards produce small data from Big Data. They add structure and scalability in both directions.

In a follow-up project to the call for evidence, we are therefore looking at different ways how financial data standards and regulatory technology can help achieve Better Regulation objectives. These possible ways comprise the definition of core data methodologies, the development of data point models, exploring the use of algorithmic standards, as well as possible uses of distributed ledger and decentralized consensus technologies. We cannot say at this stage if the vision of a “run-free financial system” is within our reach in the medium-term. But the resilience properties of the internet are one possible guide how technology could help regulatory reporting achieve its objectives in a much more powerful way in the future that will at the same time acknowledge the complexity of our subject matter.

Useful links

OECD-EC-INET Oxford Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris: Click here to register

New Approaches to Economic Challenges – Complexity of the Economy (October 2015 OECD Workshop)

OECD work on financial markets

[1] Effectiveness: Does the impact observed on the ground correspond to the outcome aimed for by the EU co-legislators?

[2] Efficiency: Is the desired regulatory outcome achieved at lowest possible compliance cost?

Of taxis and smart phones: balancing innovation and regulation

hailing appSharon Masterson, International Transport Forum Corporate Partnership Board

Necessity is the mother of invention – or is it? It could be argued that the time-honoured adage only holds when we know what we want or need. But what if we don’t? “If I had asked people what they wanted”, Henry Ford famously quipped, “they would have said ‘faster horses’.”

While the car was a revolutionary innovation, it was not immediately disruptive. Early cars were expensive luxury items, so the market for horses and carts remained intact until the Ford Model T created a mass market by making the new technology affordable, thanks to more efficient production methods.

What the transport sector is facing today in many areas follows a similar pattern. True, this time around, innovations are not as disruptive to the eye as motor cars replacing horses. Instead, current disruptive forces in the mobility sector hide under the hood of largely familiar-looking vehicles and in the invisible “cloud” – for instance in the shape of autonomous driving, electric mobility or app-based transport services.

But there are parallels. Take ride-hailing via smart phones: The technology has been on the market for several years. Not even the leading players like Uber or Didi Chuxing, its Chinese rival, have come to dominate the provision of mobility. They are rapidly gaining ground against the traditional forms of moving about in a car, however, and within a decade or two could well become dominant. In a recent survey in China, 8 out of 10 respondents aged 18 to 35 said they had already used a car-hailing app.

The potential of app-based transport has certainly fired up investors: Uber recently received USD 3.5 billion from Saudi Arabia’s sovereign fund, and Didi Chuxing raised USD 7 billion from investors and lenders, including 1 billion from Apple. Today, Uber is the world’s most valuable start up, with a market capitalisation of USD 62.5 billion. Conversely, the Nasdaq-listed Medallion Financial, a huge provider of loans to buy taxi licenses, has lost well over 50% of its stock value since December 2014.

Policy makers in many countries have been caught somewhat off guard by the rapid rise of app-based ride-hailing platforms. In many countries, regulation has been lagging and policymakers struggle in balancing the need to ensure public safety, consumer protection and tax compliance with the potential benefits: higher efficiency of transport, better service, more transparency and the simple fact that consumers like the convenience of pushing a smartphone button to order a ride.

What has not been lagging is the response of those who could possibly to lose out. Legal action by traditional taxi operators has led to some app-based services being banned, operators fined, executives taken into custody, and even violence.

Against this backdrop, a reasoned debate about principles that can serve as a basis for regulators to set frameworks is urgently needed – and this is what we have been working for at the International Transport Forum with key actors. Uber and the International Road Transport Union (IRU, globally representing taxi drivers, among others) are both members of the ITF Corporate Partnership Board (CPB),  and we brought the two together at our 2015 summit of transport ministers. For the first time ever, Uber’s chief strategist David Plouffe and Umberto di Pretto, Secretary-General of the IRU, shared a stage to discuss what the rise of the shared economy means for transport. They agreed that new regulation was needed and just disagreed about how to move forward until that happened – demonstrating that constructive dialogue is possible, even invaluable in such a process.

As a next step, as part of the Corporate Partnership Board’s programme of work, a workshop was convened. Representatives from Uber and Lyft, the taxi industry, regulators, academics and other stakeholders came to Paris in November 2015 to seek points of consensus on regulation and identify persistent points of tension that need focused attention to resolve. The report emanating from that meeting, entitled App-Based Ride and Taxi Services: Principles for Regulation, will make fascinating reading for regulators. Among other things, it offers them four pieces of concrete advice:

  • Focus policy regarding for-hire transport on the needs of consumers and society. This will enable the development of innovative services which could contribute towards public policy objectives such as equitably improving mobility, safety, consumer welfare and sustainability.
  • Keep the regulation framework as simple and uniform as possible. Avoid creating different categories for regulating new mobility services. Regulators should seek to adapt frameworks to better deliver on policy objectives in innovative ways and not simply preserve the status quo.
  • Encourage innovative and more flexible regulation of for-hire transport services. Use data and the findings from data analysis for more timely intelligence to inform the policymaking process. Today’s data accuracy and availability mean that more than ever before, policymakers have tools at hand which enable them to take a more flexible approach to regulation and through monitoring, evaluate how these regulations are working, and adapt or streamline as necessary.
  • Work more closely with operators to achieve data-led regulation.. The emergence of digital connectivity and wireless communications has opened the possibility of new types of instruments that could allow better control of the efficiency and provision of services as well as giving authorities a completely new and transparent way of pursuing policy objectives.

The emphasis on the role of data here is particularly interesting. Do app-based transport services increase congestion or reduce it? Do they provide better mobility for people without cars or access to public transport, or not?  These questions, among the most hotly debated issues around the arrival of these services, can only be settled with enough relevant data. (“In God we trust, everyone else, bring data”, former New York City mayor Michael Bloomberg often said, quoting the eminent statistician W.E. Deming).

If regulators learn to work with those who have the data, and learn how to harness the power of this data, it will be for the benefit of businesses and citizens. We have also just published another report on data-driven transport policy. But – in the immortal words of Rudyard Kipling – that’s another story!

Useful links

The reports mentioned above are part of a series of Corporate Partnership Board reports. For more information, please contact either Programme Manager [email protected] or Project Manager [email protected]

Recent ITF reports:

The sharing economy and new models of service delivery

Ministers, the business community, civil society, labour and the Internet technical community will gather in Cancún, Mexico on 21-23 June for an OECD Ministerial Meeting on the Digital Economy: Innovation, Growth and Social Prosperity

What is a taxi? Regulation and the sharing economy

sharing economyToday’s post is from Darcy Allen, Research Fellow at Melbourne-based free market think tank The Institute of Public Affairs, and recent author of a new report – “The sharing economy: how over-regulation could destroy an economic revolution”.

The ‘sharing economy’ has emerged because new technologies such as the internet have drastically reduced transaction costs.

Embracing these developments, budding young entrepreneurs have launched businesses that help individuals exchange resources.

Examples such as the ride-sharing Uber and the accommodation-sharing Airbnb are making exchange more efficient by helping to coordinate information about mutually beneficial transactions. These businesses make money by taking a fee for facilitating the trade.

Why has the sharing economy emerged? The underlying reason is transaction costs – the costs of coordinating an exchange. This includes the discovery, bargaining, and policing costs of exchange.

As these costs fall it becomes more feasible for consumers and producers to transact. Transaction costs have now fallen so low that buyers and sellers can exchange the excess capacity of their existing resources with ease and convenience. Hence the emergence of the ‘sharing economy’.

The phenomenon is not limited to cars and houses, there are also sharing economy models for finance (Zopa), investment (Kickstarter), everyday tasks (Airtasker), and household tools (Open Shed).

These companies do not sell the ‘resources’ mentioned above. Rather, they sell the software, the matching algorithms, and the reputation of their business. This package provides a service where private parties can discover, bargain and police their own transactions.

Private parties are fast flocking towards these new platforms because of their advantages over traditional exchange: more sustainable use of scare resources by utilising idle capacity; often lower costs for consumers because of decentralised transactions; the ability to customise the details of the exchange; and flexible employment opportunities particularly for the unemployed.

But the future of these benefits is all but smooth sailing. The debate involves regulators, governments and incumbent industries. This is expected with any disruptive innovation. Incumbent industries scramble to protect their valuable position using the political process.

The underlying question of these debates is not really over whether the sharing economy has economic benefits. The question is over who is more effective at regulating emerging markets – governments or civil society?

A recent report by the Melbourne-based free market think tank the Institute of Public Affairs, The sharing economy: how over-regulation could destroy an economic revolution, explores how misguided and heavy top-down regulations could crowd out the benefits of the sharing economy.

Much of the problem stems from a misunderstanding of the costs of government intervention on one hand, and the increasing ability for markets, businesses and consumers to self-regulate on the other.

To be sure, these debates over government imposed control and evolving self-regulation will continue. But it is not sufficient to approach each issue on a case-by-case basis; decisions must sit within a broader regulatory design framework that provides the flexibility and adaptability to future challenges.

This post provides three such design principles.

Regulation should not be by default; it should be the second alternative if bottom-up governance fails.

Regulators must avoid hasty regulation. Imposing rules on an emerging industry naively assumes that regulators understand the future of that industry. Rather, the reaction of regulators should be to encourage and enable the development of bottom-up, organic, self-regulating institutions.

Some may recognise this as Adam Thierer’s idea of Permissionless Innovation. Governments too often follow a ‘precautionary principle’ – that is, regulating against the possibility of hypothetical harm. This locks entrepreneurs into rigid rules that stifle innovative activity.

The sharing economy has a large potential for self-governance. This is an alternative to government control. It is common for sharing economy platforms to have reputation mechanisms and insurance systems that fill some of the void where government regulation is assumed to sit.

These solutions are often cheaper, quicker and more flexible than their government alternative, and over-regulation can destroy these complex structures. It is the nature of politics that regulation is rarely able to evolve as technologies and industries evolve.

Moving away from occupational licensing as a signal of quality.

Occupational licensing is government deciding who can supply what services in the market. Licensing is often justified on the basis that it signals quality and safety for consumers.

This is all well and good, but occupational licensing also has costs. It is widely recognised that government-imposed licenses create supernormal profits for insiders, and are highly inflexible to changes in industry structure.

The sharing economy has created significant tension around occupational licensing. This is because private parties can now easily provide services – like transport and accommodation – through unconventional and decentralised markets.

The solution is to encourage alternative approaches such as professional certification to signify quality. Certification does not legally prevent individuals from providing certain services; it allows the market to decide. The benefit is that private parties determine whether the benefits of the certification outweigh the additional costs of providing the good.

We must encourage the sharing economy to create, test and refine their own certification bodies. For example, AirtaskerPRO is an additional screening process including an ID check and an in-person interview to obtain a badge on the user profile. These need to be embraced.

Make regulation technology-neutral to avoid entrenching industry structure.

Technology-specific regulation only survives the test of time when there is little innovation. Yet traditional industry structures are continually being displaced. Creative destruction is a good thing.

However, when governments regulate an industry, these regulations by their nature define and determine the structure of the industry.

Many sharing economy regulatory contests come down to questions such as ‘what is a taxi?’ or ‘what is a bank?’ As industries shift and innovate, these definitions blur. But regulatory frameworks tend to be fixed, based on the assumptions built into the industry structure that they were original designed to govern.

If governments want to encourage the sharing economy, they need provide a reliable, predictable, technologically-neutral legal system that both keeps industry-specific regulation to a minimum and favours private solutions to regulatory problems over public ones.

Useful links

The sharing economy at OECD Forum 2014

Lobbying: an opaque activity of dubious integrity?

Lobbyists vol 3On receiving my copy of Lobbyists, Governments and Public Trust, Volume 3, I rushed straight to Chapter 15, History of Slovenian lobbying regulations at a glance (and who wouldn’t?). Given that an OECD glance can be nearly 600 pages long, making you wonder how many forests would die to print an in-depth look, I was deeply disappointed to see that the Slovenian regulators only got a few paragraphs. It’s not that they don’t care. Former foreign minister Zoran Thaler had to resign from the European Parliament and got a prison sentence after admitting he’d accepted an offer from Sunday Times reporters of cash in exchange for proposing amendments that would damage consumer protection.

Slovenia seems to be an exception. An OECD survey in 2013 on lobbying misconduct concluded that “governments either have no sanctions in place or don’t apply them”. A look at the timeline for when lobbying regulation was introduced in various countries allows you to see at a (real) glance how things have evolved. The US was a pioneer, introducing rules in 1946. Then came Germany five years later, quickly followed by, well, practically nobody for the next forty years. As the new report points out, more countries have introduced regulation in the past five years than in the previous sixty.

In his foreword to Lobbyists, Governments and Public Trust, OECD Secretary-General Angel Gurria says that “lobbying is often perceived as an opaque activity of dubious integrity”. (People can be so cruel.) In general, regulation has only been brought in because of a public outcry. This is bothering a growing number of lawmakers, like US Senator Michael Bennet, who told Politico magazine that: “Something needs to change, and it shouldn’t take another scandal. The incredibly frustrating dysfunction should be motivation enough for us to make significant changes.”.

The aims and many of the tactics of lobbying haven’t changed much since lobbyists used to wait for the Senators of Ancient Rome in the lobby, but the integrity framework does need to be updated, to close revolving doors for instance. This is the name given to the practice of politicians and others leaving public service then going to work for the very people they were overseeing, or the hiring of lobbyists for government posts. The people shoving the revolving doors can be quite brazen about it. One of them boasts on the website of his employers about his experience working as a legal adviser to the European Commission and how he regularly collaborates now with colleagues in their Brussels office. Advisory groups are another worry: “Although members of advisory groups have direct access to decision makers and are therefore able to lobby from the inside, such groups are not generally required to ensure a balanced representation of interests in their make-up.”

The OECD has defined 10 Principles for Transparency and Integrity in Lobbying. Number 4 may come as a surprise: “Countries should clearly define the terms ‘lobbying’ and ‘lobbyist’ when they consider or develop rules and guidelines on lobbying.” The lack of clarity around the question is made worse by a lack of education. A 2013 survey by Burson-Marsteller found that 15% of politicians and senior officials from 20 EU countries did not know if lobbying was regulated or not and only 20% of OECD member countries with lobbying rules and guidelines in place surveyed for the OECD report organised workshops for lobbyists and 30% online training courses for public officials in the legislative branch.

Things are changing, partly you might say through self-interest. Opinion polls across the world show that public trust in government is declining and politicians are regularly down there among the car salesmen and real estate agents in lists like this Australian one of the least trusted professions. (Could any of our readers tell us why Aussies also have so little faith in ministers of religion? Is it the word “minister”?)

These same polls suggest that people tend to trust businesses, and that it’s when the two professions get together that things start to go wrong. Even though both sides of the opaque activity are to blame, the report argues that “the main responsibility for safeguarding the public interest and rejecting undue influence lies with those who are lobbied, and therefore a sound public-sector integrity framework is essential.”

If I understand it correctly, we have to stop politics corrupting money.

Useful links

Lobbyists, Governments and Public Trust, Volume 2

Lobbyists, Governments and Public Trust, Volume 1

Government at a Glance 2013

OECD work on trust in government


Rules of the road

taxis take to the streets
Taxis take to the streets

Visitors to Paris may have noticed that it can be hard to find a taxi. Lately, there have been days when it was impossible. The explanation? A strike.

Before you roll your eyes, it’s worth taking a moment to hear what’s riling the taxi-drivers. Yes, in many ways this feels like the sort of dispute we’re used to around here – shouting, blocked streets, frustrated travellers. But it also reflects issues that are playing out in many other parts of the world and that can be summed up in a word: regulation.

The roots of the dispute date back to 2009, when France licensed a new sort of taxi, a “passenger vehicle with chauffeur,” or VTC. These VTCs operate under rules similar to those covering “mini-cabs” in the United Kingdom: You can call one to pick you up at home, but – unlike a regular taxi – you can’t hail one in the street.

Even though VTCs are not full competitors, the taxi drivers don’t like them. They point to the fact that taxi drivers have to pass a test; VTC drivers don’t. But a bigger gripe is money. VTC drivers pay €120 for a licence. By contrast, a taxi licence is free – in theory. In practice, it’s anything but. In Paris, the price currently seems to about €240,000 (around $320,000). The reason it’s so high is that, as Le Parisien (in French) explains, only a very limited number of taxi licences are issued. If you want to secure a free licence you may have to wait 17 years. So, instead, would-be drivers buy licences from drivers who are retiring.

Still, despite their resentment, it’s possible that the taxi drivers might have learned to live with the VTCs – after all, old-style taxis in London seem to do fine despite being vastly outnumbered by mini-cabs. However, the emergence of new technologies has probably put paid to that hope. Using an app on your smartphone, you can order a VTC, provide your location and pay the fee with just a few swipes on your screen. That’s increasingly blurring the distinction between regular taxis and VTCs, and seems to have been the final straw for the taxi drivers. Hence the strike, and an announcement by the government last week that it would work to draft “new rules for balanced competition”.

That could prove challenging. The taxi drivers are angry: “Today, we are facing direct competition from VTCs that work virtually without regulation,” Karim Lalouani, a member of a taxi union, told RFI. “We are not fighting on equal terms.” But for their part, the VTC operators say they’re filling a gap. Certainly, by international standards France is short of taxis. The national total of 55,000 taxis and 12,400 VTCs is below the combined total of 72,000 for London alone. “People in France are fed up with monopolies,” Pierre-Dimitri Gore-Coty of US-based Uber, which operates VTC services in France, told The Economist. “The French now realise that in real life more competition brings innovation and improves the level of service.”

But even when new regulations appear, technology could make them outdated very quickly. After turning VTCs into quasi-taxis, app technologies are now turning anyone with a car, clean licence and a smartphone into a potential taxi driver, according to Stephen Shankland.

If it’s any comfort to the French regulators, they’re not the only ones facing challenges. In the United states, says The New York Times, “regulators, courts and city halls are struggling to define Uber. Is it a taxi company or a technology platform?” And it’s not just taxis. Services like Airbnb and FlipKey now mean that anyone with keys to an apartment can become a hotelier. Some cities aren’t happy. New York has subpoenaed Airbnb. By contrast, Amsterdam, has changed the rules to make Airbnb-style rentals easier.

So, what to make of this particular regulatory debate? Are existing service providers, like hoteliers and taxi drivers, being forced to play on an uneven playing field? Or are they a vested interest defending market rules that don’t serve consumer needs? Or are consumers facing increasing risks from “rogue” operators?

While pondering these questions, you might like to take a broader look at how OECD countries – including France – stand on a wide range of regulatory issues that affect competitiveness in our economies. This new data tool (below) has just been released alongside the latest edition of Going for Growth, the ongoing OECD project that examines the impact of structural policies, including regulation, on growth. The tool compares regulation and competition rules between countries across a wide range of markets, including telecoms, power and legal and other professional services. Ideal for passing the time while you’re waiting for that taxi.

Useful links

Going for Growth

OECD Indicators of Product Market Regulation

Why should the Middle East and North Africa care about regulatory reform?

Click to read the report
Click to read the report

Today’s post is by Moritz Ader and Miriam Allam of the MENA-OECD Governance Programme, Public Governance and Territorial Development Directorate

On December 17 2010 in Sidi Bouzid, a Tunisian town of 40,000 inhabitants, twenty-six year old Mohamed Bouazizi decided on a radical protest against the local authorities who were stopping him selling fruits and vegetables in the streets because he didn’t have a trading licence.  With little prospects of getting a good job, and suffering from arbitrary constraints at the hands of officials, Bouazizi set fire to himself. His death due to severe burns has not only become known as a dramatic outcry against Ben Ali’s Tunisia, but also as the trigger of the civil uprisings that have been sweeping across countries in the Middle East and North Africa (MENA) region.

Three years later, no day passes without reminding us of the challenges faced by countries in the region. Reform efforts have proved an unprecedented commitment towards more democratic policies and governance structures in some countries, whereas daily clashes amid rival demonstrations in others reveal the fragility of this process. Why should now be the time to think about such an apparently technical matter as regulatory reform? Would governments be better advised to directly tackle the most pressing challenges, such as fighting youth unemployment and increasing citizen participation? You might even wonder what “hides” behind the somewhat cumbersome term of “regulatory reform” and how it relates to the story of Mohamed Bouazizi.

“Regulation“ is one of these buzzwords you could not escape in debates on CNN, Le Monde or at the OECD about preventing a future global financial and economic crisis of the magnitude that hit countries worldwide in the recent past. The debate about both the desirable amount and design of regulation, however, has never been limited to new laws for Wall Street.

In fact, the call for efficient and effective regulations as part of the overall reform process ultimately relates to the current transition process in MENA as it questions the set of instruments by which the Tunisian government imposed requirements on citizens (and enterprises). From this perspective, regulations include laws, formal and informal orders issued by all levels of government or bodies to which the government has delegated regulatory powers. In turn, regulatory policy defines an explicit policy to ensure high-quality regulations based on a consistent “whole-of-government” approach. Admittedly, this might still appear as being too far away from the daily concerns of the man and woman on the street in the MENA region. It is not.

At this crucial moment in the MENA region, enhancing the regulatory environment should in fact be a top priority. By assessing the current regulatory environment against key principles, such as transparency, accountability and participation, the OECD actively supports MENA countries in their transition process towards more democratic and efficient governance systems. Here is how it works.

The OECD Framework for Regulatory Policy and Governance identifies three elements for regulatory reform that have been used to assess the progress of MENA countries in implementing regulatory policy: i) core policies, ii) systems, processes and tools, and iii) actors, institutions and capacities. One way to understand that this process is at the heart of their transition process is to imagine that reforming regulations is not much different from renovating a flat.

The crumbling plaster and the living room’s fusty furniture create a gloomy atmosphere rather than a cosy haven. Obviously, your flat badly needs refurbishment and a considerable facelift. This is what the OECD framework would call your core policy. In the context of regulatory reform, the call for greater transparency and citizen participation implies that the existing stock of regulation is managed. Of crucial importance for countries in the MENA region, outdated laws need to be consigned to the history books as heavy administrative burdens often serve as entry points for corruption. At the same time, a filter in the form of regulatory impact and risk assessments must ensure that future policies fit well with the stock of existing rules and support a more open and trustful relationship between citizens and the government.

In the flat, creating a more welcoming atmosphere ultimately depends upon your talent for choosing things (new chairs, paint) that complement each other nicely. A shopping list that clearly defines how your new furniture should look would help to make sure that the renovation proceeds in accordance with your ideas. In OECD’s words, effective regulatory reform depends on systems, processes and tools which support the underlying principles of regulating and governing.

Finally, as several entities are usually involved in renovation (you wouldn’t start repainting if you were going to change the electric wiring for instance), success ultimately depends on co-operation, co-ordination, communication and consultation between the individual parties. A clear definition of the functions and roles of actors, institutions and capacities marks the third and final element of OECD’s approach for assessing regulatory reform.

Regulatory Reform in the Middle East and North Africa: Implementing Regulatory Policy Principles to Foster Inclusive Growth is the first progress report that assesses the implementation of OECD regulatory policy principles in the MENA region. Including Bahrain, Egypt, Jordan, Lebanon, Mauritania, Morocco, the Palestinian Authority, and Tunisia, the report provides recommendations based on the 2009 Regional Charter for Regulatory Quality and the 2012 OECD Policy Recommendation of the Council on Regulatory Policy and Governance.

The review reveals that an explicit regulatory policy in the MENA region is still in its infancy. The countries involved do not have an explicit regulatory policy. Systematic regulatory systems, processes and tools, such as Regulatory Impact Assessments, are also new to most governments in the region. The review concludes that further efforts are necessary to institutionalise regulatory policy and governance, for instance by implementing regular performance assessments of regulations.

Improving the clarity and efficiency of regulations will benefit both citizens and enterprises and mark a crucial element in the transition process of MENA countries.

Useful links

MENA-OECD Governance Programme

OECD Forum 2011.The fight to restore trust

It’s receding into the past, but the Great Recession – and the factors that led up to it – are still very much on attendees’ minds at the OECD 50th Anniversary Forum this week. At a session entitled “Restoring Trust in the System,” a wide range of opinions were heard on lessons for financial regulation and corporate governance in the wake of the crisis.

Seated side-by-side on the first panel were ministers from two countries that had very different experienceces in the crisis: Canada, which sailed through the recession and has come to be seen as a paragon for financial regulation, and Iceland, whose Finance Minister, Steingrímur J. Sigfússon, admitted that “we were not quite as lucky as Canada”.

Steingrímur managed to get to Paris despite the clouds of ash from the latest troublesome Icelandic volcano – “we picked an easier name this time,” he joked. That led him to draw comparisons between the forces of nature and the forces of the economic system: “When faced with forces of nature, we feel humbled,” he commented. With financial markets, we need a similar attitude, he said. We must realise the limits of what we know and don’t know, he said, and admit that things went wrong: “There were fundamental flaws in the system, otherwise this would not have happened,” he said. 

The Icelandic minister raised an issue that was echoed by a number of speakers – pay and compensation for bankers and executives: “Why do we accept that bankers need tremendous bonuses to do their jobs, but not surgeons saving people’s lives?” Steingrímur asked. The point was also raised by Peter Mandelson, a former EU Trade Commissioner and British government minister. “Executive pay has become disconnected from reality,” he said, citing a big increase in payments to British business leaders. In 1998, said Lord Mandelson, payments to executives at FTSE 100 firms were 47 times average earnings at their firms; since then, they’ve risen to a multiple of more than 100, far outrunning any improvement in the firms’ share price. While stressing that he didn’t believe in the politics of envy, he said the “scale of what has happened cannot be justified.”

 But Federico Ghizzoni, CEO of the Italian-based banking group UniCredit, defended his remuneration. He said there was a perception that everyone got huge bonuses, but this was not the case. On average, he said, after-tax salaries in Italian banks were only about 30,000 euros a year. He added that half his bonus was based on customer satisfaction and his company’s reputation, as measured by an independent survey. Still, he wasn’t complacent about the challenges facing banking: “The crisis of 2007 was a crisis of values,” he said, “if you don’t measure and test the values of your management, it will come back.”

Values were also on the mind of John Hope Bryant, founder of Operation Hope, which works to expand economic education and empowerment in the US. He said the crisis had shown the need to improve financial education: “This is a civil rights issue – if you don’t understand the language of finance today, you’re an economic slave.”  

Lord Mandelson warned about the risks to social stability from the after-effects of the crisis. Despite the enormous progress in OECD countries over the past 50 years, “the mood of our citizenry is not celebratory,” he warned. There was a lot of apprehension and scepticism about politicians and business, he said, and these attitudes were very corrosive. If left unchecked, he said, they would sap our capacity to make the decisions we need to make.

Echoing Lord Mandelson’s comments, Christine Varney, US Assistant Attorney General, Department of Justice, said there was an argument for a fundamental change in the attitudes of business. At present, boards were legally required to concern themselves only with increasing shareholder value. That approach may be too narrow, she said; she called instead for a focus on stakeholder value – in other words, the interests not just of a business’s shareholders but of its customers, suppliers, and the society in which it operates. David Begg, an Irish labour leader, went further, and said that the economy must be embedded in society, and not the other way round. “Until we achieve that,” he said, “there can be no possibility of restoring trust.”

Useful links

OECD: Strengthening governance, restoring trust  

OECD work on corporate governance