Experimenting with Experimental Governance: Insights from global financial regulation

1. Experimenting with Experimental Governance: Insights from global financial regulation Professor Julia Black London School of Economics and Political Science Presentation to ANZSOG, Wellington, 4th April 2014

2. Outline • Key elements of experimental governance • Core features of global financial regulation • Insights on the challenges of experimental governance • When will experimental governance work? • Summary and conclusions

3. Key elements of experimental governance • Core elements • Knowledge and understandings • Broad agreement on the nature of the problem and goals to be achieved • Lack of certainty as to how best to resolve the problems and achieve the goals • Attitudes and behaviours • Engagement in trial and error, and learning from results • Acceptance that failures may happen • Organisational structures and processes • Decentralised implementation overseen by central coordinator / ‘director’ • Systematic processes of feedback, monitoring and evaluation • Technologies and strategies • Design and implementation of >1 strategy for addressing the problem & attaining the goal which differ in well defined and understood ways

4. Global financial regulation – experimental governance in practice? • Experimental governance can operate at sub-national, national, regional or transnational level • Global financial regulation is characterised by multitude of transnational standard setting bodies setting (more or less) broadly defined principles / goals which are implemented by national governments / regional units • Implementation increasingly monitored by systems of peer review

5. International standard setting bodies Financial Stability Board Monitoring board (IOSCO, JFSA, SEC) International Organisation of Securities Commissioners BIS Committee on Payment and Settlement Systems International Accounting Standards Board Basle Committee on Banking Supervision Joint Forum Committee on the Global Financial System International Association of Insurance Supervisors

6. FSB membership (60+)

7. Taking a closer look • Organisational structures and processes • Decentralised implementation overseen by central coordinators (though query the extent to which they are ‘directors’) • Developing processes of feedback, monitoring and evaluation through peer review • But • authority relationships between ‘hub’ and ‘spoke’ contested • the interdependence between the ‘spokes’ and the ‘hub’ is asymmetrical • ‘spokes’ are not dependent on the ‘hub’ but the ‘hub’ is on the ‘spokes’ • power relationships are uneven

8. Taking a closer look (2) • Technologies and strategies • Design and implementation of >1 strategy for addressing the problem & attaining the goal which differ in well defined and understood ways, though the scope for local variation differs across standards • But – • Extent to which nature of variation is understood is patchy • Site of experimentation is important – at rule level, or operational level? • Issues when ‘operational’ practices result in substantive differences in treatment of firms in different regimes notwithstanding the fact that similar rules are in place • More fundamentally, coming up against some key challenges of implementation • Experimenting in parallel / simultaneous experimentation • Experimenting in sequence

9. Challenges of implementation • Experimenting in parallel: challenges of difference • Coupling – extent to which regulatory systems are coupled through the activities of regulated firms • Eg single firm operating in multiple jurisdictions may simultaneously be subject to two different sets of rules (eg derivatives regulation in US and EU) • Coordination – if the problem is lack of coordination (eg accounting rules, or driving..), differentiation is not the solution • Externality effects of differentiation • Regulatory competition and races to the bottom • But races to the top can be de-stabilising too • Eg Ireland’s introduction of a 100% guarantee of all deposits in October 2008 caused significant shift of deposits from UK to Irish banks, further weakening UK banks; for this reason there is now a uniform scheme across the EU

10. Challenges of implementation cont. • For experiments in parallel and experiments in sequence • Reversibility of the ‘experimental’ measures • Extent to which they involve high levels of sunk costs • Reversibility of effects (how long should an experiment last?)

11. Challenges of acceptance and legitimation • Experimentation involves accepting change, uncertainty and the risk of failure • Can the regulators involved tolerate failure? Do they have a common ‘appetite’ for failure? • Can they learn from failures in a ‘blame free’ environment? • Are they nimble enough to change when experiments show signs of failure? • Will regulated operators tolerate the change and flux that accompanies experimentation? • Can regulated operators, politicians and the public understand and tolerate experimentations and failures? (Though isn’t all regulation an experiment to some degree?)

12. So – are there necessary preconditions for experimentalism? • Goals, attitudes and behaviours • Shared goals and understandings of the problem • Openness to experimentation and failures • Organisational structures and inter-relationships • Relationships between the ‘hub’ and ‘spokes’ • Power and authority • Interdependence • Robust systems of evaluation • Capacity for learning • Functional possibility of differentiation • Coupling, coordination, reversibility • Strategic and operational ‘nimbleness’ to respond to outcomes • Sunk costs, eg contrast ‘nudge’ type experiments with technology based experiments • A political climate that will tolerate failure

13. Summary and conclusions • All regulation is an experiment to some degree • Without strategic experimentation, regulation (or anything else) will never improve • though the status quo can be comfortable for powerful stakeholders • But strategic experimentation is organisationally challenging, and there are functional limits to the nature and scale of experimentation that can occur - context matters