Professor Julia Black reflects on Ethics for Regulators

What is an ethical regulator? The Nolan Principles provide a good starting point: ethical regulators are those that uphold and enact the values of selflessness, integrity, objectivity, accountability, openness, honesty and leadership.

There has been considerable academic and policy focus, quite rightly, on openness, transparency and accountability of regulators. Also on how their leadership is appointed, and by whom, and on their independence both from those they regulate and from politicians.

There has been less focus on the ethical standards of the behaviours of regulators. In contrast, the question of how to internalise ethical standards of behaviour in individuals within regulated organisations is a key regulatory concern in a number of areas. It has long characterised the regulation of the professions such as doctors, solicitors and barristers, and has moved into the financial markets in the wake of the Libor and similar scandals. In the last few years, two new UK self-regulatory bodies have been created whose focus it is to drive ethical behaviour in banks and in the wholesale financial markets: The Banking Standards Board (BSB) and the Fixed Income, Currencies and Commodities Markets Standards Board (FSMB).

Focusing on the ethics of regulators thus mirrors the focus on the ethics of the regulated.   In both cases, ethical behaviour has an outward-facing and inward-facing dimension. In terms of internal ethics, there is research documenting whether or not regulators have codes of ethics (e.g. not to purchase shares in firms they are regulating), or policies on taking appointments in the regulated industry. But there is very little research on what their internal codes of behaviours are and how well they are observed, and even less on the quality of their leadership. Similarly, there is a great deal of research on the effectiveness of various regulatory interventions in firms they regulate (e.g. whether regulators adopt a ‘compliance’ or ‘deterrence’ orientated approach) and on the transparency and openness of regulators. But very little research has been done on how some of the other the Nolan principles translate as external behaviours towards not just those they regulate but to those on whose behalf they are regulating. Or indeed translate as behaviours to their political overseers.

The Nolan principles are relevant in the regulatory context not just in how regulators behave towards political overseers but how political overseers behave towards regulators.   Take the recent example of the dismissal, in effect, of Martin Wheatley as the chief executive of the Financial Conduct Authority. Though within the Chancellor of the Exchequer’s legal powers, his removal has so alarmed Parliament that the Treasury Select Committee is requesting an amendment to the Bank of England and Financial Services Bill to require TSC approval for any future appointment to the chief executive position of the FCA, and a veto over any attempt to remove them.   Balancing the independence of regulators with their accountability is a notoriously difficult task, but politicians need to remember that much of the legitimacy of regulators comes from their independence from political interference, and they should use their powers of intervention cautiously and wisely.

Focusing on behaviours can also provide a useful counterbalance to the usual focus on organisational structures and regulatory techniques. Behaviours, and their elusive counterpart, culture, are critical to how structures and techniques operate in practice: they lubricate structures and transmute techniques. Which leads us to the final question: are ethical regulators also effective regulators? In principle, a regulator could be ethical but ineffective, or effective but unethical. But in each case, only up to a point. If regulators are to retain their social and political licence, they need to be both effective and ethical. We are accustomed to assessing their effectiveness; the CSPL’s project provides a welcome focus on their ethicality.

Professor Julia Black, London School of Economics and Political Science 

CSPL is currently undertaking a review of ‘Ethics for Regulators’. The review is a ‘health-check’ of the way in which regulators manage ethical issues in their own organisations and the extent to which the unique characteristics of regulators create or demand any specifically tailored ethical solutions.

Leave a comment