Regulatory Capture

In Jacob’s Law of Trusts in Australia (7th Edition) the following is stated at [2904]:

“The tightness with which superannuation funds are regulated stems partly from the legislature’s determination to prevent the tax concessions that accompany them from being abused. It also exists because the size of the assets in superannuation funds is so great, the number of potential trustees are so large, the opportunities for carelessness or worse to lead to dissipation of the assets are so many, and the consequential adverse effects on the Commonwealth’s liability to pay old-age pensions are seen by it as potentially severe.

However any regulatory system, established in order to protect the members of the public is always at risk of being compromised do to “Regulatory Capture”.

Both ASIC and APRA are classic examples of “Regulatory Capture“.

Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure; it creates an opening for firms to behave in ways injurious to the public (e.g., producing negative externalities). The agencies are called “captured agencies“.

Likelihood of regulatory capture is a risk to which an agency is exposed by its very nature.  This suggests that a regulatory agency should be protected from outside influence as much as possible. Alternatively, it may be better to not create a given agency at all lest the agency become victim, in which case it may serve its regulated subjects rather than those whom the agency was designed to protect. A captured regulatory agency is often worse than no regulation, because it wields the authority of government.

The United States Securities and Exchange Commission (SEC) has also been accused of acting in the interests of Wall Street banks and hedge funds and of dragging its feet or refusing to investigate cases or bring charges for fraud and insider trading. Financial analyst Harry Markopolos, who spent ten years trying to get the SEC to investigate Bernie Madoff, called the agency “nonfunctional, captive to the industry.”

Similarly in the case of the Allen Stanford Ponzi scheme, there were repeated warnings of fraud from both inside and outside the SEC for more than a decade. But the agency did not stop the fraud until 2009, after the Madoff scandal became public in 2008.

Exchange of Personnel

A mechanism that promotes Regulatory Capture is the exchange of personnel between the “Regulator” and the industry that it “Regulates“. Public servant employees of the regulatory agency are often “promoted” to the companies within the regulated industry at higher salaries.

Fairfax Media reporter Michael West when commenting of the Senate Inquiry into ASIC in an article published on 26 October 2014, titled “Planning scandal response shows banks above the law”  stated:

“Those who followed the inquiry will be familiar with the testimony of James Wheeldon, a former lawyer at ASIC who exposed in intimate and unassailable detail how the regulator not only does favours for the big banks but even allows them to have a hand in formulating the nation’s laws. Specifically, Wheeldon testified to the role played by lobby group the Financial Services Council in jagging a special exemption from the law. Further , he described how a lawyer from MLC – owned by National Australia Bank – had been seconded to a team involved in formulating the legal exemption.”


The Failure of the US Securities and Exchange Commission to Identify the Bernie Madoff Ponzi Scheme

The US Regulator, the Securities and Exchange Commission (SEC), failed to identify the Ponzi Scheme run by Bernard Madoff despite multiple submissions by Whistleblower Harry Markopolos over a period of a decade.

The SEC Official Inspector-General’s Report on this failure can be found here.

A lack of properly qualified and experience staff was one of the findings of the report as to why the SEC failed to identify the Ponzi Scheme.

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This tab updated on 21 July 2015