“As simple as possible but not simpler”

There is a line usually attributed to Einstein – that things should be made "as simple as possible but not simpler". When it comes to regulation, most public discussion fails on both counts.

Why there is an understanding gap

When regulators make the headlines, it’s almost always for the wrong reasons. Regulator “prevents mis-selling”, or “reduces risk of firms failing” is rarely newsworthy, or provable. “Mis-selling scandal” or “Firm collapses” on the other hand…

As a result, many regulators’ default instinct is defensive. This translates differently depending on the audience. For industry, it tends to mean couching policy and actions in familiar language; for politicians, it can be minimising points of difference and skating over potential implementation problems and future downsides; for the media, it’s often about simplifying and over-promising, avoiding areas of uncomfortable uncertainty. As you may have noticed, some of this just kicks cans down roads.

While there is a broad acceptance among regulators that each of these audiences should have a good understanding of regulation, this consensus is weaker when it comes to the wider public. In 2003, 14% of the UK population could identify the Financial Services Authority (FSA) as the UK’s financial services regulator, with another 18% recognising it if prompted[1]. This led to a debate inside the FSA about whether these numbers should be higher, with some arguing it would be better if the regulator was neither seen nor heard of. The balance of this argument has shifted since, yet even now little of the communication from the FCA’s successors, the Prudential Regulation Authority and Financial Conduct Authority seems designed for those outside the bubble.

If the regulator’s attitude towards wider public understanding has primarily defensive motivations, the reticence of industry and politicians may be less innocent. It’s far easier to complain about burdensome regulation and regulatory scandals – both of which exist more than they should – than admit to the industry shortcomings that the “burdensome” rules were designed to prevent, or justify the constraints politicians put on the regulator’s powers that contributed to the scandal.

The harm it causes

The most striking harm caused by the resulting gap in public understanding is a lack of accountability. Regulators should not be blamed any less for their failures. But politicians, typically of every colour, who lambasted regulators for stopping firms taking more risk should be held responsible when that risk-taking goes wrong. And the industry figures and lobby groups who campaigned to weaken a regulatory regime shouldn’t be let off the hook when that regime cannot cope with the next crisis.

More widely, the understanding gap contributes to a decline in public trust. What the public sees is a system not working reliably, and when something goes wrong it’s them who pick up the bill, as either taxpayers or consumers. Regulators are blamed (often rightly) but nothing else happens. Or, if it does, only very slowly. Neither is this just a financial services issue – both Grenfell and the water industry are prime examples.

And there is other harm. Regulators’ reluctance to explain their role and powers more fully – including the trade-offs and the limitations of their powers – leaves a vacuum that others fill with over-simple and sometimes dishonest soundbites. The pretence of many politicians that it’s possible to have everything, all at once – rapid growth and innovation as well as stability and consumer protection – is left largely unchallenged. And bad actors and excessive risk takers are thus encouraged in the expectation, born from experience, that neither regulators nor politicians will be in a strong position to come after them when the next crisis occurs.

How to bridge the gap

Our book’s core audience is obviously regulators themselves and those who work in regulated industries but, driven by the above ambition, we’ve also written it to be read by the wider population. If we’ve got it right, its language and arguments are neither too insider-friendly to be comprehensible by others, nor too simplistic to insult their intelligence.

To state the obvious, regulation has an inherent level of complexity so none of this is easy. In Building Better Regulators we’ve tackled it in several ways:

1.      Explaining the major choices and trade-offs that regulators must make in straightforward language. For example:

• being “proportionate” means accepting weaker protection, and more failures, among smaller firms in exchange for lower burdens – and creating cliff edges at every threshold;

• being “principles-based” means sacrificing some clarity and consistency for the sake of being more flexible and future-proof;

• regulators acting earlier means they’re doing so on less information and therefore with less certainty and less chance of success.

2.      Including a series of short and diverse case studies, drawn from across the world and cross-referenced to the main part of the book so that they can be used as an alternative way in.

3.      Having lots of original cartoons, created by Lyndon, that highlight some of regulation’s absurdities and conundrums and take the edge off what easily become a too-heavy subject.

4.      Using diagrams to help visualise what the text is describing, while making both text and diagrams as standalone as possible.

5.      Improving readability by:

• unpacking technical language and explaining acronyms where they are important, avoiding them when they’re not;

• breaking down the text with sub-headings that help move it forward, and using bullet points to separate out the different elements of an argument;

• organising the book by chapter headings that are accessible to outsiders, and which are recognisable across different regulated industries.

On the substance of what regulators do and how they do it, we’ve worked hard at meeting Einstein’s test – as simple as possible but not simpler. We might not have succeeded – that’s for readers to judge – but if we haven’t it’s not for want of trying.

Last thought

Whether we like it or not, regulators and regulation aren’t going away. Since we started writing, three years ago, there’s been a lurch towards deregulation, rapidly growing debates around AI and crypto, and a new focus on the role of regulators in many other aspects of our lives – from water to the environment to football. But, with a few honourable exceptions, the level of discussion hasn’t improved. Building Better Regulators is our contribution to changing that.

[1] FSA’s Reporting Against High Level Indicators (June 2003)