15th February 2023

Making regulation work better

To improve outcomes for consumers, businesses and society in general, the theoretical underpinnings of much of our regulation are due for a rethink, believes Professor Chris Hodges

By Richard Young
The difficult point is that this challenges traditional ideas of how we regulate and, in particular, how we enforce
Of course, you need to make rules and you need to inspect and identify breaches, but maybe one can do that better with a collaborative approach

Professor Chris Hodges is perhaps the UK’s foremost authority on regulation – and, specifically, on making regulation better. Through his work at the Centre for Socio-Legal Studies at the University of Oxford, his chairmanship of the Regulatory Horizons Council and his many books – including, most recently, Outcome-Based Cooperation In Communities, Business, Regulation, and Dispute Resolution, he examines how potentially abstract concepts can be applied to real-life scenarios through an understanding of human behaviour.

“The Centre for Socio-Legal Studies is a part of the law faculty, but it is multidisciplinary,” Hodges explains. “We were set up 50 years ago in order to examine how law works in society. There are lawyers, sociologists, legal anthropologists, economists and various other types of academic looking at a huge array of situations where people are involved with society’s rules or state rules, and how those systems work.

“As a lawyer, I’ve been focusing on psychology for several years, but you’ve also got to know about economic theory and legal philosophy in order to understand more about what works and why – and how we can improve it.”

Hodges’ recent work examines the role cooperation has to play in creating good regulation. “The idea of looking at cooperation came out of my reading and thinking about how humans have changed the institutions within which they cooperate over millennia, almost since homo sapiens started,” he says.

The principle of cooperation is built on trust, Hodges points out. “If you trust one another, then you can cooperate well – it’s very simple. Of course, when you start looking at real life as it exists, you see impediments; we could misevaluate the evidence if we haven’t got enough of it. Trust involves a mental attitude, and we can be wrong. But actually, values of fairness are consistent. Most humans have got a complete set of values, unless you’re a psychopath. But we emphasise some values in some situations more than others. For example, people who feel under threat emphasise defensive and aggressive tendencies, whereas people who feel confident are much more benign and altruistic, and therefore cooperate more.”

A more refined understanding of cooperation and its benefits raises the potentially awkward fact that the often punitive approach of conventional regulation is at odds with hardwired human behaviour. “There is a great deal of evidence of how regulators and enforcers work in different sectors, and what works and what doesn’t work,” says Hodges. “A lot of it is in silos, but if you are able to see the overview, it builds up to a very significant and consistent picture. The difficult point is that this challenges traditional ideas of how we regulate and, in particular, how we enforce.”

Taking flight
Hodges cites the aviation sector as an example of how cooperation can underpin more effective regulation. “The aviation sector adopts what it calls ‘performance-based regulation’, in which they almost remove blame in order to get everyone to cooperate. Planes stay in the sky, and we all have confidence and trust when getting on a plane that we will get off at the other end. It’s quite remarkable when you consider the technical complexities and the number of people involved.

“It boils down to what they call an open and just culture. In an open culture, they share all information all the time on the basis of trust; and in a just culture there are always consequences when a problem is identified.

“But it’s not necessarily what we would call enforcement traditionally; in fact, the CAA very rarely uses fines, and only occasionally removes a license. It’s a different approach. They changed the language, and changed the mood in order to achieve this stunning outcome. But, importantly, they don’t have to deal with many criminals.”

Hodges contrasts the cooperative model of the aviation industry with the carrot-and-stick approach of the financial sector. “Many big financial companies have historically set targets for individuals and sack the bottom 10% of performers,” he says. “It turns out that the performance of that bottom 10% is actually totally accidental and arbitrary. The punitive culture doesn’t build confidence and intrinsic motivation.”

If such practices persist, Hodges says, “crises are going to continue happening in the financial system. One of the things that got me interested in this was looking into a lot of literature on the cause of the global financial crisis in 2008. It isn’t just me; every governmental body, from the Basel Financial Stability Board down, started talking about culture. But culture is a very slippery concept; how do we measure culture? What is it?

“You’ve got to have an ethical culture, ultimately. There are plenty of cultures that exist which are not ethical – for example, China or Russia or any dictatorship; they work to some extent, but are they stable and sustainable? Are they producing good outcomes?”

Cultural shift
Collaboration is essential to creating systems of regulation that benefit society, Hodges believes – and strengthening cooperation between Trading Standards and businesses is an important part of this. “The key point here, conceptually, is that the legal model of regulation through making rules, inspecting and identifying breaches, imposing sanctions, and assuming that sanctions will deter and achieve compliance, is usually not particularly reliable,” he says.

“Of course, you need to make rules and you need to inspect and identify breaches, but maybe one can do that better with a collaborative approach.

“There need to be consequences for bad behaviours. But is that best done through sanctions in the traditional enforcement approach? Well, of course it is if you’re protecting society from criminals, but if one’s dealing with businesses where one needs to improve their performance, then different approaches work. It becomes more complex and needs more tools in the box.”

One of those tools, Hodges says, is what he calls ‘outcome-based cooperative regulation’. “The simple idea behind outcome-based cooperative regulation is that we need to work out what it is we’re trying to do. In other words, agree all the purposes and the outcomes. Are we producing harm, or are we producing good? Usually regulators and enforcers measure outputs. In other words, numbers of inspections, guidance, documents, produced fines, imposed prosecutions, etc. Those aren’t outcomes.

“As one American Chief of Police said, you can have millions of fines, but does that make the streets safe? We must also produce evidence of trustworthiness which is assessed against our inherent understanding of what is right and wrong. So let’s work on this and produce more evidence that we can be trusted.”

Trading Standards, with its responsibility for enforcing more than 250 laws and encouraging compliance across a wide range of sectors and activities, is in many ways a somewhat more complex proposition even than keeping planes in the sky. Surely that creates particular obstacles to cooperation?

“Yes, some situations are easier than others, some sectors are easier,” Hodges concedes. “Trading Standards, in my view, is critical and essentially important. But there is a sort of schizophrenia; there has been a change from a perception of Trading Standards as being just about enforcement to a perception of it as a means of support in many cases. The idea that it is only about law enforcement, I think is a really limiting approach.

It’s a highly professional job which needs lots of skill, and it produces some fantastic outcomes.

“Sometimes you don’t need to ‘regulate’ in a culture of openness and growth. A lot of the concepts and a lot of the ways we work, are changing quite considerably. It’s immensely exciting because it improves how we operate, and improves the outcomes that we get as regulators or enforcers in terms of helping businesses do better. And of course, that’s what we need as a country just at the moment.”

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