Of Regulatory Roles and Uncertainty

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It is always grim news when any operator is fined or sanctioned by its oversight regulatory authority. Regulators are public authorities or government agencies responsible for exercising autonomous authority over some area of human activity in a supervisory capacity.

Regulatory agencies are usually a part of the executive branch of government. They are commonly set up to enforce standards and safety or to oversee use of public goods, and regulate commerce in every critical sector such as aviation, banking, drugs and health care, telecoms, electricity, oil and gas and criminal justice to mention a few.

From an operator’s perspective, regulators pose their own risk within the system, known as regulatory risk. This is the risk that a change in laws and regulations will materially impact a business, sector or market. A change in laws or regulations made by the government or a regulatory body can increase the costs of operating a business, reduce the attractiveness of investment and/or change the competitive landscape.

The regulatory space has thus become inherently more complex, with supervision and enforcement more confrontational, intensive and intrusive. Regulators are making judgements both about the robustness of regulated firms’ business models, and the suitability of the products they are selling. They will intervene promptly if they see or anticipate problems.

Before this era of seeming tight regulations in some sectors, we operated in an environment in with very weak enforcement of rules, allowing large vested interests to have virtually unimpeded sway in crucial decisions that had far-reaching consequences for the economy. As examples, unscrupulous property developers were known to build without proper approvals, and dupe unsuspecting investors in a large number of cases. A few petroleum importers have been indicted for billing the government for dubious import cargoes, and selling their products above approved prices. The stock market saw a historic crash in 2008 because of illegal modes of leverage. The banking sector is one area where the regulator’s hand has been comparatively stronger, even though much room for improvement remains. There are innumerable examples where, due to political clout and relative impunity against regulatory action, large vested interests were routinely able to skirt or defy the regulatory framework within which they operated.

While some sectors appear to be tightly controlled, others seem weak and poorly regulated. I will argue that regulatory instability, and institutional failures are deeply rooted in weak risk management practices in our economy. Without being sector specific, it would seem that sharp practices, profit seeking, and quick reward activities take pride of place over safe and healthy operating processes. The dearth of qualified employees, inefficient allocation of resources and lack of political will are plausible explanations for failure to enforce regulations and standard setting in some sectors in Nigeria. Sanctions such as closures of defaulting operators may not be the solution, as this often leads to job losses, and reduced government revenue through taxes.

Some laws in our business environment appear to be changing for the better, although how far this will go remains to be seen. Lately, we observe how regulators are standing up to enforce rules and moderating risky behavior in various sectors. This stamping of authority must however not create uncertainties that could be counterproductive. Regulation should not result in business failures. Regulators should be the solution and not the problem. They must understand the changing dynamics of the businesses within the sectors overseen. The public interest must be protected rather than getting caught up in the stormy winds of our political culture.

One of the primary goals of the regulatory process should be to prevent and mitigate market participants’ behavior that significantly degrades system reliability and market efficiency.

The motivation for getting people to do something done right is often hard to pin-point. But motivation often boils down to the ‘what’s in it for me’ syndrome and profit seeking. If people think that they can get away with cutting corners, or even doing misdeeds, then they might be tempted. But this is a long slippery slope into chaos, once one firm steps out of line and is not sanctioned, or does something brilliant and is not rewarded, then any kind of behaviour is deemed acceptable.

The reason why risk and reward are so co-joined is that risk-taking behaviour is firmly linked to the ‘what’s in it for me’ syndrome. Inappropriate risk-taking can put the whole system in jeopardy, and is a potential cause of systemic failures.

Motivation by regulators for getting the right risk-taking behaviours is critical to the long-term wellbeing of every sector. There needs to be a clear and fairly exercised reward and sanction programme that is consistent and transparent – and applies to every organisation from the biggest to the smallest. There is a translated local proverb; ‘when the roots of a tree begin to decay, the branches will eventually die’.

Keeping decay from the roots of our businesses is about ensuring the right behaviors take place in all risky transactions, and that means getting the right reward and sanction process in place.

Knowledgeable risk professionals must be employed to strengthen enterprise-wide compliance programmes and implement effective governance and risk management frameworks.
Risk management practice and effective policy intervention are critical to achieve stable business environment and sustainable development. The improvement of risk management within the regulatory space will greatly help reduce any potential regulatory failures.

Firms on their part need to proactively navigate the many touch points where regulation makes a significant impact on their businesses. All areas of a firm’s activities and its interactions with regulators must be addressed. The response and management of the regulatory environment is crucial to future success of operators.

• Mbonu, FERP, CIRM(UK), HCIB, MsRM (Stern), studied Engineering, is an experienced Banker and Enterprise Risk Management professional. Earned a post graduate degree in Risk Management from New York University Stern School of Business, and is a member of the Institute of Risk Management -UK. Can be reached on 09092092046 (SMS Only); email: rm4riskmgt@gmail.com