Regulators and Conflict of Interest

An efficient regulatory regime can play an important role to ensure good governance as well as ensure rule of law.

Posted on 03/17/19
By Ikram Sehgal | Via ViewsWeek
(Image by succo, CC license)

A governmental body created by a legislature to implement and enforce specific laws, a “Regulatory Agency” or a “Regulator” would usually have quasi-legislative functions, executive functions, and judicial functions. Many laws govern social and economic matters, such as income tax, environmental laws, occupational health and safety laws, real estate law, employment laws, etc. A regulatory agency serves two primary functions in government: implement the laws and enforce the same. Regulations are the means through which a regulatory agency implements law enacted by the legislature.

While a good regulatory environment is an essential for any nation, high performing regulators are a key lever to encourage innovation across the economy and foster productivity growth through (1) timely approval processes (2) flexible approaches to new issues and (3) a service focus. Role clarity requires the regulator’s objectives, functions and scope to be clear, a mandate that is not conflicting (or provides for resolution of conflict), the nature of the policy role to be defined, and the power to cooperate transparently with other bodies. Regulators should never be assigned conflicting or competing functions or goals. The regulator exists to achieve objectives deemed by government to be in the public interest and operates using the powers conferred by the legislature. Accountable and reporting regularly and publicly to the legislature on its objectives and the discharge of its functions. A regulator must demonstrate that it is efficiently and effectively discharging its responsibilities with integrity, honesty and objectivity. A system of accountability needs to clearly define what the regulator is to be held accountable for, how it is to conduct itself and how this will be assessed. For matters of clarity and fairness, Regulators who are appointed to regulate or oversee a particular industry or sector cannot work or be attached with any other commercial interest in any capacity, similarly anyone who might be working with or is attached with any commercial entity in any capacity cannot join any Regulatory Agency for a stipulated period of time. This is the norm the world over.

In a hard hitting commentary in Oct 2014, Veronique de Rugy Senior Research Fellow at the Mercatus Center at George Mason University and a syndicated columnist wrote, “Consider the recent revelation that the regulators at the Federal Reserve in New York were cozying up with one of the nation’s biggest financial institutions it was supposed to oversee. Secret recordings made by Carmen Seqarra, a bank examiner for the Fed in New York—parked at Goldman Sachs—exposes the degree to which Fed regulators were actually failing the taxpayers they allegedly protect against the “too big to fail” corporations that the government created.  According to Segama, it was common belief among Goldman employees that, depending on the client, they could choose which consumer rules to follow—or not follow—without any fear of consequences from the Fed.” Unquote. This is an example of how the regulators can knowingly fall prey to conflict of interest.

All of Pakistan’s 18 regulator bodies function directly under the government, those who man these bodies are also hired and fired by the govt. Our regulators appear to be subservient to the dictates of the government of the day and other vested interests, having surrendered their constitutional independence.  In Pakistan the opposite of what the world follows is the norm and many of our regulatory authorities have been in the news for all the wrong reasons.. It is normal for anyone attached to a particular industry or sector to be appointed a regulator, specifically. How can anyone in Regulator capacity oversee/regulate an industry/sector in which he/she was attached with before becoming a regulator? But it has happened. Nomination and appointment of the regulator’s leadership should be based on transparent and accountable processes. Clear conflict of interest rules should be in place to support independent behavior while in employment and upon exiting. In Pakistan anyone from a regulator agency can also work with in any other commercial entity without any problems. This gives rise to conflict of interest when someone’s judgement can be influenced, or perceived to be influenced, by a personal, financial or other interest.

Working in two separate capacities simultaneously and drawing remuneration that is many times more than they are getting as regulators,  they are compromising the fairness and neutrality of the office they hold as regulators. To safeguard against this and stop unfair practice, there should be a gap of a few years before being allowed to take up another job in the same manner as in Pakistan’s Armed Forces, which is also applicable to  government servants, gap of at least two years minimum in mandatory before they can take up another government job. One measure should be to enforce a ban on regulators from joining firms they regulate for at least five years after leaving the agency. It should be a matter of some concern that appointments for members of regulatory authorities and commissions have been challenged in courts on many occasions.  The conflict of interest may lead to the development of regulations to benefit an industry, special interest group or person, in a reluctance to enforce regulations, or in favored treatment of the regulated group or person. Since there is a cycle where the regulatory agencies over time can degenerate into protecting the organizations which they are supposed to regulate, checks and balances must be put in place so that persons in responsible positions in these bodies are not corrupted.

The Armed Forces have a mandatory two year period before any individual can take up any job in the private sector, and that also with permission. Consider that the former foreign-owned TELCOS employ former intelligence agency officials, this compromises their former agencies. Consider why the largest fives in the world for bribery and corruption US$ 850 million have been paid less than a week ago by WIMPLECOM, the owner of the JAZZ, the largest telecom in Pakistan.  Similarly TELENOR, the second largest TELCO in Pakistan, was also fined by the Norwegian government hereby for malpractice.

An independent, multi-disciplinary organization working to advance the rule of law around the world, the Washington-based World Justice Project’s Rule of Law Index Report 2019 indicates the poor state of the regulatory mechanism in Pakistan, ranking Pakistan 116 in regulatory enforcement among 126 countries assessed countries in the world. This deplorable situation should be a cause of concern for the govt. The performance of regulatory bodies is anything but satisfactory and instead of ensuring an efficient regulatory regime in the country, these bodies have often been found entangled in various controversies and financial scams.

An efficient regulatory regime can play an important role to ensure good governance as well as ensure rule of law. Unfortunately, our many regulators have not been able to perform entrusted tasks, more regrettably not one of the many governments who held the reins of power have made any serious attempts to improve the efficiency and institutional capacity of the regulators. Corrupt elements within regulatory bodies continue to have a field day, they must be replaced with honest professional people to run them.

 

The writer is a defense and security analyst.

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