The concept of regulatory failure has been discussed before in previous blog posts. Some scholars examine regulatory failure from a public choice and public interest perspective. Others examine regulatory failure from an institutional perspective. These views often overlap with theories of policy process. Both perspectives focus on how regulatory systems change over time and are perceived as being ineffective when they are not. This can also be true when new regulations are layered on top of old ones. In this case, regulation often fails because the changes are small and inconsequential, and it is hard to see coordination between new and old regulation.
The concept of regulatory failure is problematic because there is no clear definition of what constitutes a regulatory failure. Some experts argue that regulatory failure can be defined as failure of policy or regulation despite its apparent benefits. However, there are several ways that regulators can fail. First, they can make a regulation too costly. Second, they may not have a clear idea of the costs associated with the regulation. Third, regulators may fail to distribute the costs and benefits of regulation evenly among stakeholders.
Other examples of regulatory failure are creative compliance or design failure. Creative compliance is generally seen as situations in which regulatees comply with the letter of the law. But it can also be a step further. For example, in the Volkswagen Dieselgate scandal, the regulators installed a defeat device in vehicles that reduced emissions when tested in a laboratory environment, but failed to evaluate these emissions outside of this setting. In this case, creative compliance was the result of regulatory failure.
Regulatory failures can occur at many levels in a financial institution. Bank failures have serious consequences for consumers, investors and the economy. While financial institutions are subject to numerous regulations and supervisory reviews, some failures go unrecognised or are too weak to detect the risks associated with systemic crises. The examples in this chapter illustrate the complexity of the regulatory process and the impact of regulators’ inaction. It’s crucial to remember that regulatory failures are often far more common than a common perception.
Another example of a recent unregulated product is the LCF scandal. LCF was an authorised company, but the mini bonds it issued were unregulated. Hence, the Financial Services Compensation Scheme protection for investors is absent. As such, small investors believed that their money was safe. Moreover, the FCA and FSCS staff simply did not understand the difference between regulated and unregulated products. And because of this, regulators often failed to warn people about the risky mini-bonds.
Barclays’ management prides itself on aggressiveness, yet it is clear that they were aware of their internal control failures. The FSA, the regulators, and the public were concerned about Barclays’ use of complex structures. In April 2012, the FSA wrote to the Barclays Chairman and expressed its concern over the use of complex regulatory approaches. Nonetheless, the bank denied the FSA’s recommendations.
In conclusion, regulatory failure can be defined as the inability of a regulatory agency to achieve its objectives. This can be due to a variety of factors, including inadequate funding, lack of enforcement authority, or political interference. The consequences of regulatory failure can be significant, including increased pollution, public health risks, and financial instability. In order to prevent these consequences, it is important for regulators to have the necessary tools and resources to carry out their mandate.
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