Regulatory styles #2

Blog - Regulatory styles #2

Robert Aurbach | Published: April 21, 2015

The "lassiez-faire" style of regulation is based upon trust in the natural relationships of the stakeholders and service providers.

In a "laissez-faire" system, the mutual needs of the parties and market forces in the environment are presumed to balance one another in ways that yield a smoothly functioning system with minimal intervention.

One example of a "laissez-faire" administrative scheme is Tasmania. For the most part, the scheme gets along with minimal resources and staffing by virtue of reasonable trust in the power of the stakeholders and service providers to control themselves in the small "everyone knows everyone else" environment.

From the regulator's point of view, his or her basic desire to function "under the radar" is satisfied.  The system operates reasonably well with little intervention, and there is little need to go to the Government for more administrative resources. 

When small matters come up, the regulator can always decline to intervene, based upon resource limitations. Most often, the parties will find a way to reach equilibrium again. The difficulty is that, if the issue doesn't sort itself out, the decision to take no action will simply give the problem longer to develop and become entrenched.

In Australia, laissez-faire systems tend to thrive in markets with relatively small populations, where they can be quite stable and predictable.

Once the parties have established their interrelationships, there is little to cause them to change.  The regulator is not actively forcing compliance with his or her dictates and the size of the business environments makes social and informal controls over misbehaviour more effective than can be relied upon in a larger environment.

In laissez-faire systems, the stakeholders and service providers are much more likely to have pre-existing relationships outside the compensation environment. Informal controls, such as inclusion in referral and recommendation networks and reputational risk can make or break a business in a small community. Social relationships in a small community are more likely to restrain aggressive behaviour in the marketplace.

Laissez-faire systems can get into trouble either when the overall environment changes or when social systems of control break down. Environmental change can come in the form of economic expansion or contraction, changes in the mix of industries or changes in the available technology defining the state of the art in claims or injury management.

When social controls break down, laissez-faire systems are often less effective at preventing or responding to intentional aggressive or predatory behaviour, particularly from service providers that are coming from larger environments.

There are two problems: the regulator often will not have the data to understand that something unusual is happening until it has grown into a significant issue, and the regulator may not have the tools or resources at that point to take effective action.

This is the major weakness of the laissez-faire approach. They tend to be both data and resource poor. These systems can be slow to respond to "stressors" in the system. Problem detection and definition can be slow. Responses can be hampered by insufficient personnel or enabling legislation that is out of touch with the pace of change in the industry. These issues have little respect for "how we do things here".

Since things are changing at a very high rate in compensation and injury management at present, participants in laissez-faire systems have a stake in helping the regulator to maintain the relative informality of the environment. This isn't always easy. Complaints about "unfair competition" may be seen as self-serving and get the standard "not enough resources" response.

A different approach can be very helpful. 

Laissez-faire systems are resource poor, and the data necessary to assist the regulator in acting may need to be collected and analysed by the regulated.

A "we think something important is happening" meeting can occur, with follow up collection of supplemental data when necessary to convince the regulator that the matter is significant and that it will not go away on its own. 

Systemic responses will have to account for the resource limitations of the regulator as well. It may be necessary for a group of members of the affected industry to take the lead in developing a solution, or engaging outside expertise for that purpose. 

Solutions should reflect, to the extent possible, a consensus or majority view, so as to offer the regulator a solution that is ensured to have support and be minimally controversial.

Informally administered systems do not have to be unsophisticated. It is possible to take the advances of larger environments and make them suitable for implementation in closer environments. The trick is not to resist change, but rather to respond to change in a manner that reflects the existing needs and resources in the particular environment. One size does not fit all.  What works in Sydney might work in Darwin, but only with significant work to make it suit the local environment.

By stepping up and providing the regulator with the data and administrative support necessary to address matters as they arise, participants in a laissez-faire system can maintain their informal environment while responding to a changing world.

Next: The Collaborative Regulatory Style