RISK BASED REGULATORY PRACTICE & ITS IMPACT ON THE ECONOMY. Annual Regulatory Conference SEPTEMBER 2014

Transcription

1 RISK BASED REGULATORY PRACTICE & ITS IMPACT ON THE ECONOMY Annual Regulatory Conference SEPTEMBER 2014

2 AGENDA BACKGROUND THE LINK BETWEEN REGULATION & COMPETITIVENESS RISK BASED REGULATION WAY FORWARD

3 BACKGROUND Strategy & organisational design consultant - working across public sector & private sector in South Africa, Africa, Europe and USA Worked with SARS, CIPC, NRCS, National Consumer Tribunal and many other regulatory bodies A recovering ex HR Manager - so people & what motivates them is an abiding fascination! Restless, curious soul who enjoys challenging conventional thinking and working collectively with people to build futures that are sustainable, successful & improve quality of life A patriot who believes deeply in the future of my country, continent and the inherent goodness, commitment and dedication of its people Believe - SA public sector has many highly dedicated, committed and competent people who are let down by politicians who fail to live out ethical, visionary and responsible leadership

4 WHAT KEEPS ME AWAKE AT NIGHT? Deeply concerned economically falling into a downward cycle - ultimately negate the vision of a successful, prosperous country and continent The National Development Plan is a courageous, bold and visionary initiative that fails to tap collective commitment of people who should be aligned behind its execution The structuring of our overall regulatory environment is doomed to failure - countless small regulators duplicating infrastructure, wasting resources & failing to focus their limited time, energy and resources on addressing the behavioural underpinnings of successful regulation

5 QUESTIONS AND HYPOTHESES What is the impact of regulation on competitiveness of our economy and how are we doing? What is the purpose of regulation and what are the root causes of challenges & opportunities we face? What can we do about all of this? I will recommend that we: Adopt an innovated approach to regulatory organisational design - a front : back organisational design Implement a coherent and systemic approach to risk based regulation based on mutual input and collaboration between regulators and regulated Invest efficiency savings in technology and people

6 2014 WORLD ECONOMIC FORUM S GLOBAL COMPETITIVENESS INDEX REPORT

7 WHAT IS COMPETITIVENESS? the set of institutions, policies and factors that determine the level of productivity of a country playing to win in the global economy more we create wealth, more our fiscus earns required income from taxes to drive social and infrastructural investment, more foreign capital & job creation Level of productivity sets the level of prosperity earned by an economy A measure of our ability to create economic value and wealth to best benefit the citizens of our country

8 2014 WORLD ECONOMIC FORUM S GLOBAL COMPETITIVENESS INDEX REPORT Key indicator, 2012 GDP (PPP) per capita (int l $), POPULATION (millions) 50.6 GDP (US$ billions) Thousands South Africa Sub-Saharan Africa 6 GDP per capita (US$) 7,507 GDP (PPP) as share (%) of world total The Global Competitiveness Report World Economic Forum

9 2014 WORLD ECONOMIC FORUM S GLOBAL COMPETITIVENESS INDEX REPORT Global Competitiveness Index Stage of development GCI GCI (out of 144) GCI (out of 142) Rank (out of 148) Score (1-7) Basic requirements (40.0%) Institutions Infrastructure Macroeconomic environment Health and primary education South Africa Efficiencydriven economies Efficiency enhancers (50.0%) Higher education and training Goods market efficiency Labor market efficiency Financial market development Technological readiness Market size Innovation and sophistication factors (10.0%) Business sophistication Innovation The Global Competitiveness Report World Economic Forum

10 2014 WORLD ECONOMIC FORUM S GLOBAL COMPETITIVENESS INDEX REPORT The most problematic factors for doing business Inadequately educated workforce Restrictive labor regulations Inefficient government bureaucracy Corruption Poor work ethic in national labor force Inadequate supply of infrastructure Crime and theft Policy instability Access to financing Insufficient capacity to innovate Foreign currency regulations Tax rates Tax regulations Poor public health Government instability/coups Inflation Note: From the list of factors above, respondents were asked to select the five most problematic for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings The Global Competitiveness Report World Economic Forum

11 INSTITUTIONS PILLAR Wastefulness of Government Spending Burden of government regulation 97 out of out of 148

12 STRUCTURAL CHALLENGES TO REGULATORS Fragmentation of Government agencies Slow changes to mandate as a result of the legislative change required Lack of organisational agility external change beats speed of internal change Duplication of administrative infrastructures Inefficiency as a result of a lack of scale Inefficiency as a result of a failure to invest in the right people and technology Need t decrease and incre value

13 FRONT-BACK ORGANISATION Customer-facing front ends - engage with each regulatory marketplace / industry based upon the unique dynamics of that industry / regulatory marketplace - with a common philosophy or approach that guides its efforts An efficient back end with configured administrative processes and systems, tailored for each front end that utilises scale to invest in the best possible managerial talent, the best possible ICT solutions inclusive of architectures capable of data mining, intelligence and analytics Integrating mechanisms to link the front and back end for maximum impact

14 VIRTUOUS CYCLE Efficiency savings reinvested in IP & people Competitive SA economy increases funding from fiscus Greater impact, decreasing compliance gaps More competitive businesses & individuals Fair, equitable regulatory burden

15 THE REGULATORY GAP AT THE FRONT END Regulatory activity focused on core mandate or most visible elements of mandate gap in total mandate Regulatory activity focused on major cities - easy to provide administrative, supervisory or enforcement presence Regulatory activity focused on inspections or limited to cases brought by irate consumers or affected parties

16 HALF TRUTHS & REALITIES The Principle of More - more supervision and enforcement drives greater regulatory impact Focus on Known rather than Unknown or What we don't know, doesn't hurt us focus on community of organisations who comply know who they are & where they are located - rather than bridging the unknown compliance gap - finding those who we don't know about, who aren t complying! Regulatory capture is a subtle reality - Inspectors love inspecting those traditionally called on - where everyone knows, understands and plays by the regulatory dance

17 RESULT We fail to focus on the compliance gap We increase the burden on those who are generally compliant Our inspectors are bureaucrats who tick boxes and are stifled by administration! We decrease competitiveness rather than enhance it!

18 REGULATION Oxford English Dictionary - the act or process of controlling by rule or restriction Is a binding legal norm created by a state organ that intends to shape the conduct of individuals and firms. State organ - legislative, executive, administrative or judicial body legal power to create and enforce a legal, binding norm An intervention in environment or marketplace places limit on freedom in best interests of society and its citizens Often based upon a market failure to ensure fairness or equity or to protect citizens from abuse Government intervention in private domain - a by-product of imperfect reality & human limitation

19 COMPETITIVENESS AFFECTED BY. Inefficient deployment of resources money spent on regulatory administration, not on directly value-adding activities such as sales, marketing, product development etc. A regulatory burden that is unequally spread benefitting some at the expense of others Regulatory activity that fails to target with precision the behavioural motivations, intentions and underpinnings behind conduct

20

21 RISK BASED REGULATION The risk approach centres on determining probability and impact factors, deciding on regulatory response, the development of regulatory tools, and most importantly, informing allocative decisions in deploying limited resources PROFESSOR JULIA BLACK London School of Economics HUTTER The Attractions of Risk Based Regulation Systematised decision making frameworks and procedures to prioritise regulatory activities and deploy resources, principally relating to inspection and enforcement, based on an assessment of the risks that regulated entities or individuals pose to the regulator s objectives.

22 ALTERNATIVE COMPLIANCE MODELS Non-compliant Noncompliant Maximum sanction Non-compliant Deliberately Non-compliant Maximum sanction Licence Revocation Licence Suspension Dualistic Model Accidently Non-compliant Lesser sanction Criminal Penalty Civil Penalty Warning Letter Compliant Compliant No sanction Compliant Compliant No sanction Persuasion Simple dualistic compliance model Compliance continuum Compliance pyramid used for traffic violations

23 Consequence ATO RISK MATRIX Extreme 2 Monitor Type Review High High Severe Severe Severe 1 Proactive Very high Continuous Monitoring Continuous Review High High High Severe Severe Review high Significant Significant High Severe Severe Timing Medium Periodic Monitoring Periodic Review Moderate Moderate Significant Significant Significant Periodic Low Negligible Negligible Moderate Moderate Significant 4 3 Reactive Rare Unlikely Even Chance Likely Almost certain Likelihood

24 RISK BASED MANAGEMENT RISK CONTEXT RISK IDENTIFICATION RISK ASSESSMENT RISK MITIGATION RISK MONITORING Intent & priorities Intent, strategies & assets Analyse & evaluate risk Treat risk Monitor & review What we are trying to achieve Critical vulnerabilities & Credible threats / opportunities Current control effectiveness Who to treat with what Evaluate efficiency & effectiveness Deter, detect & deal with Communicate & consult Strategic Operational Tactical What is it Who is it How to treat it

25 RISK MANAGEMENT Better understand the risk context Identify the types of risks, their impact and consequences Assess and evaluate the current ability of the regulator to deal with the potential risk Understand how best the risk may be mitigated Monitor and review risk so that the regulator may learn from the way risks play themselves out in the environment

26 High impact High risk Low probability Medium risk High probability Low risk Low impact

27 REGULATORY STRATEGY What is the purpose of Regulatory Strategy? Recognise & accredit Educate & assist High Low Impact Warn Fines & penalties High visibility prosecution Compliance Ignorance Avoidance Willful Evasion Compliance behaviour

28 CHANGING BEHAVIOUR THROUGH VARIETY OF INTERVENTIONS Reinforcing, encouraging or rewarding compliant behaviour Penalising & disincentivising those who choose not to comply Informing those who are unaware of the need to comply Discourage those who are inclined to ignore the need to comply Informing those who don't know how to comply

29 IMPLEMENTING A RISK BASED APPROACH Front-End - deeply understands dynamics of regulatory context, especially how compliance gap is formed and motivators affecting the behaviour of regulated Front-end - segmented according to characteristics of importance to environment may be product types, different types of impact or consequence Front-end - well informed by effective intelligence gathering, data mining and analytics often reliant on Back-end IT architecture & predictive analytics Back-end - administratively efficient & provides single view of regulated and their behaviour / conduct over time Back-end - focused on developing skills & competencies at Front-end engaged and well informed at all times

30 GREAT STRATEGY & RISK BASED REGULATION Bold, courageous aspirations - inspire and motivate ordinary people to achieve extra-ordinary things Making important choices about where and how to deploy scarce resources Focusing on Where to Play to Win Understanding How to Play to Win Developing the capabilities required to win Building management routines required to ensure that excellence is championed, replicated & innovated over time

31 CHANGE People support what they help to create Effective rgulation is only possible with the consent, trust and support of the regulated Regulation that is poorly applied, inconsistent, unfair, punitive and illinformed breeds resistance, avoidance and resentment RBA requires a new investment and a retooling of the regulator Lets work as a community to build a competitive economy through fair, responsible and targeted regulation

32 RISK BASED REGULATORY PRACTICE & ITS IMPACT ON THE ECONOMY Thank You