OECD Regulatory Policy Outlook 2021

1. Regulatory policy 2.0

Abstract

This chapter provides a glance at the future and attempts to set a scene for regulatory policy for the next decade, one that is more agile, better reflects changing environment, including fast technological changes, and evolving government priorities but one which is still firmly set in the foundations described by the existing OECD Recommendations relating to regulatory policy.

Key findings

• Global crises and complex policy problems are forcing governments to consider how to regulate better, both for now and for the future. The existing concept of “better regulation” is grounded in a framework of institutions, tools and processes developed over the last 30 years. As demonstrated in the 2015 and 2018 Outlooks, regulating in “normal times” is already challenging but global crises such as the COVID-19 pandemic has placed even bigger stress on systems of regulatory policy making. Coupling this with complex policy problems – such as the platform economy, inequality, climate change and ageing populations – and headwinds of hyper partisanship, distrust in public institutions, and the pace of technological change, it is clear that new approaches are needed to address current issues and put government in a position to respond effectively to future problems.

• A “regulatory policy 2.0” agenda offers an opportunity to adapt, amend and create a more agile framework for better regulation. This chapter seeks to elaborate elements of this problem and opportunities for progress. It takes what has been created over the last few decades and discovers what is still fit for purpose and what needs to be adapted for the future of regulation. It starts by recognising that the implementation of regulatory policy is suffering from significant gaps. First, regulatory policy remains underutilised by governments compared with the attention that is given to tax and spending measures and the efforts made in those areas. Second, it continues to be a trend that regulatory management tools are under-developed, insufficiently implemented or applied with unsatisfactory effects. Third, by relying on conventional models of human action, regulators can fail to consider behavioural barriers and biases that limit the effectiveness of implementation of regulatory policy.

• Technological innovation is significant driver of this agenda, forcing governments to move past the traditional “regulate and forget” mindset and develop “adapt and learn” approaches. This will enable societies to realise the benefits of innovation while upholding protection for citizens and the environment. Governments across the globe face new challenges that strain capacity and create a strong need to rethink and reinvent many aspects of regulatory systems. The case for change stems from the regulatory challenges and the opportunities brought by technological developments (including to strengthen regulatory capacity), as well as new trends or significant events such as the COVID-19 pandemic. The social and economic disruption that the pandemic has wrought further highlights the strategic importance of developing more agile and co-ordinated regulatory approaches to increase responsiveness and resilience in changing environments.

• The regulatory challenges brought by emerging technologies warrant a paradigm shift in policy making and administration. Governments must ensure that the innovation that can power economic growth and solve the world’s most pressing social and environmental challenges is not held back by regulations designed for the past. Likewise, they should avoid innovation being hindered by rigid enforcement that focuses on the letter and not the goal of rules. More agile, flexible and resilient governance and regulatory practices are needed to unlock the potential of emerging technologies, while upholding protection of health and safety, environment, social justice, and other societal goals.

• Better use and adaptation of regulatory management tools to improve the agility, quality and coherence of the rule-making system is essential. Traditional regulatory management tools, such as regulatory impact assessment (RIA), stakeholder engagement and ex post evaluation, need to be adapted to help governments navigate the challenges and the opportunities brought by transformative changes and choose the right approach – regulatory or otherwise – to improve societal welfare. These new challenges also call for an increase in regulatory coherence, aligning regulatory governance with strategic governmental goals such as the Sustainable Development Goals. More recent pillars of regulatory management, such as international regulatory co-operation, must be employed to improve the effectiveness of regulatory frameworks. This has become ever more evident with digitalisation that ignores national or jurisdictional boundaries while drastically increasing the intensity of cross-border flows and transactions.

• Applying lessons learned from behavioural insights (BI) can improve the institutions and processes of regulatory policy making, including throughout the policy cycle. BI has demonstrated its effectiveness in supporting better regulatory policy design and delivery. However, the complex system of institutions and processes underlying policy making is run by people, who can experience the same biases and barriers as individuals. Reforms to these institutions and processes, such as creating a new oversight body or implementing regulatory management tools, can run headlong into behaviour change issues that ultimately limit their success. The next frontier is to take lessons from BI applied to policy and extend these to the internal workings of government to improve policy making from a system perspective.

• The delivery stage of regulation is critical in this context, particularly through smarter enforcement and inspections, which are based on (and proportional) to risks, and focused on outcomes. As again highlighted by the COVID-19 crisis, governments need to develop and implement risk-based, professional and flexible regulatory delivery across regulatory spheres and sectors, harnessing in particular the opportunities provided by digital technologies and improved availability and use of data to make such approaches both easier to introduce, and more effective.

• Governments need to (re-)build trust in regulation and regulatory services, through better communication strategies, shifting from public consultations to stakeholder engagement and demonstrating good governance of regulatory institutions.

Introduction

As ably demonstrated by the 2015 and 2018 OECD Regulatory Policy Outlooks, regulating in “normal times” already represented a significant challenge for countries. Throughout the last decade, we have witnessed a series of regulatory challenges, many stemming from the need to ensure an inclusive and sustainable recovery from the Great Recession (2007-09). In a number of instances, outright policy failure has resulted where regulatory policy processes had been rushed or completely ignored

Yet these almost pale into insignificance compared with the seemingly insurmountable challenges societies currently face and will likely face in the coming years. Against a backdrop of a once-in-a-century global health and economic crisis, hyper-partisanship, general distrust of decision makers, and the seemingly ever-quickening pace of technological change, regulatory policy has never been more crucial. The ability to provide clear, well-reasoned and evidence-based public policy will help to rebuild, refocus, and reform economies for decades to come, which ultimately supports more effective rulemaking and building the trust of citizens.

The necessary rebuilding of economies and society will challenge the very foundations of the social compact – something that has become increasingly strained in recent times. It will require changes to the regulations that underpin the market economy, to better balance economic efficiency with inclusiveness, resilience and sustainability goals. No doubt, these changes in regulatory approaches may meet some opposition. Yet demonstrating the need for change and highlighting that there are superior alternatives to the status quo are two of regulatory policy’s core strengths.

Regulatory policy begins with a clear enunciation of a public policy problem. Unfortunately, recent history has given us many: climate change, inequalities from globalisation, ageing populations, and a seemingly inexorable spread of platform businesses. These trends will continue to challenge the way we work, live, and operate as a global society. To combat these problems, governments will inevitably need to intervene. Even with the best of intentions, policies can occasionally be rushed, poorly thought out, or rolled out without adequate prior consultation, which may eventually result in situations where governments do more harm than good. What is required is a process of engagement and evidence gathering to help make policies stronger and more robust.

This chapter details how regulatory policy itself is not immune from these challenges. It too will need to evolve and adapt. This chapter should attempt to set a scene for regulatory policy for the next decade, one that is more agile, better reflects changing environment and evolving government priorities but one which is still firmly set in the foundations described by the 1995 and 2012 OECD Recommendations – regulatory policy 2.0 if you will.

Why the reinvention of regulatory policy?

Regulatory measures have been essential at nearly every stage of resolving the COVID-19 crisis and dealing with its social and economic effects. In this context, governments still need to uphold the well-tested principles of regulatory policy and the rule of law. The use of regulatory discipline (as currently defined by the 2012 Recommendation of the Council on Regulatory Policy and Governance) is key to the post-COVID recovery and, more generally, to the proper functioning of economies and societies. Despite governments’ efforts, rule-making activities are still suffering from significant gaps; this is exacerbated by the fact that regulating itself has become increasingly difficult. Many citizens around the world are experiencing regulations that either fall short of their intended effects or outright fail to offer the protections they promise. A key concern is that inappropriate rules may lead to a loss of trust in institutions and even in government itself. Good regulation is instrumental to build confidence that decision makers are actually concerned with the betterment of society.

Three sets of issues best encapsulate the shortcomings and limitation of regulatory policy and its implementation. First, and as already stated in the previous instalments of the Outlook, a number of regulatory management tools are under-developed, insufficiently implemented or their implementation did not lead to the expected results. While some progress has been made as regards stakeholder engagement and regulatory impact assessment, there is significant room for improvement at the subsequent stages of the Regulatory Governance Cycle. One of the critical gaps stem from the very limited focus on ex post evaluation of laws and regulation partly due to the limited amount of resources and investments. Many regulations often remain on the statute books without ever being evaluated whether they are fit-for-purpose and achieve the goals for which they were adopted. While the ex ante assessment of newly developed regulations is becoming more common, it is much rarer that governments systematically review regulations after a certain period of time, besides ad hoc reviews mostly focusing on administrative/regulatory burden reduction.

A whole-of-government approach to regulatory delivery is still rather rare across much of the OECD. Common frameworks, processes, methodologies and data sharing amongst enforcement and inspection agencies would ensure more linked up approach to managing societal risks. Yet the structures, allocation of resources, methods and practices in regulatory delivery remain too often based on legacy/path dependency. Regulatory delivery is marked by overlaps and duplications of enforcement functions and gaps at the same time. Facing resource constraints, delivery suffers from inefficiencies in targeting inspections and enforcement activities, unequal implementation of effective risk-management and lack of focus on compliance promotion (see Chapter 6).

Similarly, only a limited number of countries have developed a cross-governmental vision of international regulatory co-operation (IRC), while domestic solutions are largely insufficient to tackle the global challenges faced by governments. These weaknesses undermine the quality of regulatory frameworks which, in turn, can result in ineffective policy intervention, failing to protect citizens. Appropriate IRC can help manage cross-border risks, promote work-sharing and pooling of resources across governments for effective regulatory responses, reduce costs of production and facilitate trade. IRC is therefore an important building block of structural regulatory reform to embed resilience in regulatory frameworks. This has been reaffirmed in the COVID-19 pandemic, during which momentum was high to ensure an effective approach to face the pandemic as well as its economic and social consequences, and the rationale for embedding international co-operation and impacts as fundamental pillars of regulation to address the crisis and its aftermaths and prevent future ones became undeniable.

Second, regulatory policy still remains underutilised by governments when compared with the efforts associated with tax and spending measures. Fiscal policies are usually developed in consultation with stakeholders; impacts and trade-offs are identified; and they are subject to significant scrutiny. Even though these are the hallmarks of regulatory policy, somehow, a disconnect has been allowed to permeate between fiscal and ‘other’ measures. Whilst it is understandable that fiscal policy measures attract a lot of interest, it does not follow that other things governments regulate are somehow of lesser importance. After all, these other laws have provided – and continue to provide – inalienable rights, the judicial system, a plethora of laws aimed at saving peoples’ lives, and the protection of endangered flora and fauna, to name but a few. Given the importance of these other laws to everyday life, it is disappointing – and at worst dangerous – to continue to eschew the value that regulatory policy offers. Regulatory policy offers a robust yet flexible framework, combined with powerful tools, which help policy makers create better laws. Put simply: if it is worth regulating, it is worth regulating well.

Regulatory policy as an important lever besides monetary and fiscal policies is still not attracting the attention it deserves from governments. While achieving the Sustainable Development Goals, fighting climate change or tackling the population ageing issue have become the most important goals for many governments across the globe, regulatory policy is rarely mentioned during political declarations announcing government plans to achieve those objectives. This is surprising and in a way disappointing as regulatory policy offers a set of powerful tools that should help governments in their efforts to achieve the above-mentioned goals.

Third, failing to consider the behavioural drivers of human (in)action is another factor that limits the effectiveness of regulatory policy. One of the central goals of regulation is to change behaviour in some way. Understanding how social context and behavioural biases affect decision making can help policy makers understand the drivers of actions, ultimately helping to improve the effectiveness of a regulation. For this reason, policy makers around the world are turning to the field of behavioural insights (BI) to support better regulatory policy making.

More can still be done to leverage the power of BI. OECD research demonstrates that BI is mostly used to address issues of individual behaviour and often towards improving the implementation of non-behaviourally informed policy (OECD, 2019[1]). There is opportunity to use BI both throughout the policy‑making cycle and to changing organisational behaviour, especially government itself. The system of regulatory governance can be strengthened by using BI to guide policy makers to the right regulatory tools and processes, as well as provide motivation for possible reforms. This would help ensure the best tools for solving a regulatory issue are considered at every stage of the policy-making process.

These challenges are not new and have been prominent for some time already. In addition, across the globe have to face new challenges connected to rapidly evolving, new trends or significant events such as the current COVID-19 pandemic.

Regulatory challenges raised by new trends or events

Challenges raised by technological transformation

During COVID-19, society’s reliance on digital solutions has never been greater. Governments have harnessed digital technologies to support the public-health response to COVID-19 worldwide and secure the continuity of their operations and service delivery. These interventions include outbreak monitoring, case identification, contact tracing, evaluation of interventions and communication with the public. More important still, with the pandemic considerably accelerating and reinforcing prior trends, digital technologies have reshaped the way in which we work, keep in touch, go to school and shop for essentials goods. The deterministic influence of digital and emerging technologies on societies will only grow in the years to come (see Chapter 6).

In this context, governments face an increasingly daunting task in administering their responsibilities as regard technological transformations (Box 1.1). Governments will need to foster innovation and accommodate technology-driven disruption while upholding a level of protection for people, businesses and the public interest at large perceived as adequate. They will need to develop agile and future-proof regulatory approaches while at the same time balancing the need to provide stability and predictability for businesses. They will need to enable greater experimentation under regulatory supervision while also reforming regulation and rules to avoid the creation of uneven playing fields and stranding legacy assets.

Box 1.1. Transformative changes brought by technological developments

The industrial changes brought by technological transformations are unprecedented in view of their pace, scope and complexity. This “revolution” is made of parallel technological breakthroughs which have led to the development of new products, new services and new business models that were hardly imaginable even a few years ago. Recent technological advances span a wide range of areas, from digital technologies (e.g. artificial intelligence, blockchain or the internet of things), to biotechnologies (e.g. gene editing) and advanced materials (e.g. nanomaterials).

These technological developments will have far-reaching consequences for the well-being and cohesion of society as a whole, as well as deep impacts on businesses in all sectors through their effects on productivity, employment, skills, income distribution, trade and the environment.

Digitalisation, in particular, has proved a very powerful means to promote wider consumer choice, stronger competition and greater subjective well-being. It can also entail significant risks and adverse effects, including by significantly disrupting labour in traditional markets, marginalising fragile populations, promoting the dark economy and raising profound challenges as regard data protection, privacy or discrimination for example.

Against this background, regulation is essential to mitigate the risks of technological transformation while promoting useful innovation, experimentation and entrepreneurship. Yet, while pace of digitalisation and its impacts on society and markets have been widely addressed by the OECD and others, far less attention has been paid to the actual consequences for the rule-making activities of governments.

It is clear that sweeping technological advancements are creating a sea change in today’s regulatory environment. The governance and regulatory challenges raised by innovation can be broken down into four main categories (OECD, 2019[2]):

• Difficulties to cope with the accelerated scaling of digital technologies;

• Erosion of the usual delineation of markets, challenging the scope of regulators’ mandate and remits;

• Enforcement challenges;

• Fragmentation of regulatory frameworks across jurisdictions while most emerging technology generate strong cross-border effects.

Beyond these regulatory challenges, governments also face growing public and political pressure to develop new approaches to innovation, in order to avoid hindering the development of useful innovation while ensuring that the downside risks are effectively managed. There is, for example, an increasing expectation to change the way online platforms are regulated. These (belated) calls for regulation have triggered the emergence of many reform proposals and the introduction of new regulations. Unhelpfully, little attention has been given in turn on how regulatory practices should evolve. Yet, with the benefit of hindsight, it is clear that rushing into regulation and bypassing standard regulatory policy protocols is not an optimal strategy. It entails real risks of regulatory failure, including:

• Unnecessary barriers to the spread of innovations that serve the public interest (e.g. through unnecessarily opaque, incomplete, redundant or overlapping regulatory landscapes) ;

• Failures to mitigate the downside risks that innovation can entail.

The first type of regulatory failure can be difficult to detect but the resulting opportunity costs may loom large for economies and societies, in particular in a context of slow productivity growth. While the second type is often much easier to diagnose, a major concern is that its consequences might not be reversible in some cases (e.g. gene editing), entailing potentially severe societal damage.

Both failures highlight a strong need for governments to proactively engage with innovation and use regulatory policy as an effective tool to navigate the associated challenges and, ultimately, choose the right regulatory (or alternative) approach. The traditional regulatory policy tools provide important opportunities to consider, consult, question and test the approaches that may help achieve general policy objectives. They can support governments in choosing between regulatory and alternative approaches to promote digital innovation while mitigating the risks. Results of recent cases studies on technological transformation highlight that a variety of regulatory approaches have been implemented by governments (OECD, 2021, forthcoming[3]) These range from explicitly preventing the development and adoption of digital technologies, to adopting a “wait and see” approach to discover which perceived risks materialise, or piloting of innovative approaches such as the adoption of fixed-term regulatory exemptions (e.g. regulatory sandboxes) for innovative entrants that maintain overarching regulatory objectives, such as consumer protection.1

Regulatory policy tools are key to help governments identify strengths, weaknesses and needed adaptations of existing laws. While interesting regulatory practices are emerging across countries in this area (Box 1.2), more would need to be done to maximise the opportunities brought about by technological transformation and mitigate the risks of regulatory failure. As regards IRC in particular, much more can be done to co-ordinate government policies and develop effective regulatory action across borders. The regulatory divergences across jurisdictions are, to some extent at least, an illustration of the lack of regulatory co-operation. Such differences should not be downplayed, as they hold the potential to undermine the effectiveness of action, further undermine peoples’ trust in governments and generate barriers to the spread of beneficial innovations. Similarly, the outcomes of a survey launched by the OECD shows a raising awareness among countries of the need to adapt RIA practices to deal with the concerns raised by technological transformation but few initiatives have been effectively launched so far.

Box 1.2. Regulatory management practices related to technological innovations: recent initiatives

International regulatory co-operation: responses to the transboundary challenges of technological transformation are emerging, notably through the development of an architecture of international and regional organisations and greater awareness at the domestic level of the limitations of unilateral action. As an example, Canada has enshrined a key principle of International Regulatory Cooperation in its Cabinet Directive on Regulation. In the financial sector, a number of initiatives have emerged, such as the co-operation between the Abu Dhabi Global Market (ADGM) and the ASEAN Financial Innovation Network on a regulatory sandbox initiative; the creation of the Global Financial Innovation Network (GFIN) to promote a global financial sandbox; and the significant number of ‘Fintech bridges’ implemented across the world (e.g. co-operation agreement between the United-Kingdom and Australia to foster co-operation between governments, financial regulators and businesses). On December 2020, seven governments (Canada, Denmark, Italy, Japan, Singapore, the United Arab Emirates and the United Kingdom) announced the creation of the Agile Nations, the world’s first intergovernmental alliance aiming at fostering co-operation across borders towards more agile, flexible and resilient governance and regulatory practices to unlock the potential of innovation. The Agile Nations Charter1 sets out each country’s commitment to creating a regulatory environment in which new ideas can thrive. The agreement paves the way for these nations to co-operate in helping innovators navigate each country’s rules, test new ideas with regulators and scale them across the seven markets;

“Whole-of-government” approach to rulemaking: some jurisdictions have developed a range of institutional mechanisms to tackle fragmentation, including in the United Kingdom with the Ministerial Group on Future Regulation and the Centre for Data Ethics and Innovation.

Stakeholder engagement: a number of jurisdictions have started putting a strong emphasis on stakeholder engagement to respond to the opportunities and challenges arising from digital technologies. The 2018 Digital Charter of the United Kingdom brought together the government, the tech sector, and businesses and civil society to collectively address the challenges of digitalisation and find solutions. This involves making it as easy as possible for citizens to give their views and harnessing the ingenuity of the tech sector, and to look to them for answers to specific technological challenges. Denmark has launched a set of key principles to follow during rulemaking, in particular at the impact assessment stage, which highlight the importance of supporting companies’ ability to test, develop and apply new digital technologies and business models. Another interesting initiative has recently been launched by the UK Financial Conduct Authority. In 2019, it released a broad call for inputs to better understand the scale of interest and the potential of cross sector regulatory sandboxes. The objective is to allow business to test new products, services or ideas in a controlled environment with simultaneous oversight from multiple regulators working together.

1. https://www.gov.uk/government/publications/agile-nations-charter.

Benefits and potential pitfalls in using technology for regulation

Digital transformation offers major opportunities for governments to strengthen their regulatory capacity (see Chapter 6). The technological evolution can offer new innovative approaches to resource-constrained governments and regulators, and to support more effective and efficient rulemaking. For instance, Artificial Intelligence is increasingly being piloted to support reviews and consolidation of regulations, because of its ability to cover massive amounts of legislation and look for links between texts from different sectors, administrative levels, etc.2 Increased capacity to gather, manage and analyse data also means that the evidence base for the regulation-making process can be significantly broadened and strengthened. Risk analysis and risk assessment can be considerably improved at both strategic and operational levels. Technological change can also enable major improvements in regulatory delivery both in terms of improving the rapidity of responses and precision of targeting (data interconnection, Machine Learning etc.) – and to monitor complex, widespread, remote objects and phenomena. Real-time monitoring, e.g. through the use of remote sensors can also enable the effective implementation of performance-based regulation (e.g. in pollution control – see also Chapter 6, section on Outcomes-focused instead of process-focused regulation).

At the same time, new technologies can also present some potential pitfalls, e.g. when increased technological capacity and decreasing costs lead to the impression that, in a given areas, “total control” may be possible (through a combination of real-time, widespread monitoring, use of the Internet of Things, etc.). The question is not only whether this is actually feasible, but whether it is desirable. First, quite obviously, a massive extension of remote surveillance raises major concerns in terms of individual rights and freedoms, and the fact that technology makes the “surveillance state” easier to implement and more “effective” should make democratic governments all the more cautious about engaging too far in such approaches. Second, excessive reliance on increasing the regulatory reach through technology and automation presents serious problems even from the perspective of regulatory effectiveness, and even assuming that concerns about individual rights are set aside (for the sake of argument) or can be effectively addressed.

Indeed, while excessive reliance on remote surveillance can cause serious vulnerabilities, over-enthusiasm for a massive extension of control is also based on fundamentally flawed premises concerning both the “fitness-for-purpose” of remote controls, and their impact on compliance. On the former, it assumes that remote surveillance and data will be adequate, and reliable. In fact, a large number of risks, that regulation aims to address, are very difficult or impossible to control remotely (e.g. many food-safety risks relating to personal hygiene, handling, etc., cannot effectively be remotely monitored). Moreover, while undertaking to extend control as much as possible reflects a vision founded on distrust (i.e. it assumes that there is always a need to control more, i.e. that violations of rules are likely otherwise), the tools of remote control are themselves eminently vulnerable to fraud, hacking etc. In other words, if the extension of control is seen as necessary because of distrust in the actors of the current system (be it economic operators or state employees), then technology-enabled “extended control” is not a logical proposition, since the same possibilities of dissimulation and manipulation exist (or, arguably, are increased).

Thus, technology should not be seen as a substitute to sound regulatory design and delivery, but as a new instrument to implement good regulatory practices in an even more effective way.

Regulatory policy and COVID-19

The ongoing COVID-19 outbreak has placed governments worldwide under extreme pressure to put in place emergency regulations for containing the epidemic.3 Responding to the epidemic has involved regulatory issues at nearly every stage. Regulation affects the availability of tools to identify and fight the disease (tests, products and devices) and impacts upon the ability of public utilities to maintain critical services, of food to be produced and delivered, of essential services to continue functioning. Beyond the immediate crisis response, regulatory issues also matter in enabling economic and social recovery, and to be better prepared for future crises. A selection of some of the government’s COVID-19 response measures are set out in Box 1.3. Governments have been faced with a particularly challenging set of policy trade-offs as they develop these regulations, e.g. what kinds of restrictions should states be imposing on work, play and freedom of movement? When should they open up for business? How open should they be, exactly, and exactly when? (Sunstein, 2020[4]) The potential consequences of any regulatory (or non-regulatory) decision are perhaps far more widespread than normal times, with significant economic and social impacts.

Box 1.3. Regulatory measures which governments have put in place in response to COVID-19

In the United Kingdom, the Government put in place emergency primary legislation (the Coronavirus Act) in March 2020, as well as 70 pieces of secondary legislation as well as a series of non-legislative changes. The legislative changes granted police, immigration officers and public health officials’ new powers to detain potentially infectious persons and prohibit and restrict gatherings and public events for the purpose of curbing the spread of COVID-19. Regulations for public and health services were changed to allow streamlined approaches (such as to medical prescribing); and temporary relaxations of competition legislation in defined areas (such as ensuring better co‑ordination of food supply) and relaxation of vehicle testing rules. The majority of the Act’s provisions were intended to expire after two years, although the legislation allowed for this period to be extended by six months or shortened.

In France, the parliament adopted the Emergency Law to Address the COVID-19 Epidemic in March 2020 declaring a health emergency in the country to counter the spread of the coronavirus, a move that gave the Government greater powers to fight the spread of the disease. The text of the legislation enabled the French government to restrict people’s freedom of movement and rule by decree to requisition certain goods and services, over a period of two months. The bill also empowered the Government to take special economic measures in support of French companies hardest hit by the virus outbreak. The emergency was originally planned to last for two months from the day of its adoption, although in May 2020, the parliament has since voted to extend the state of emergency until June 2021.

In Korea, no lockdown has yet to be imposed on any city or region. Instead, the government urged citizens to comply with distance measures and encouraged employees to work from home. On 22 March 2020, the authorities started a distancing campaign for four weeks (e.g. encouraging the population staying at home and avoiding mass congregations). Korea's containment strategy was based on testing, tracing and treatment. Testing has involved innovative methods such as drive-through and walk-through testing facilities, along with the rapid development of tests, allowed extensive testing. With respect to tracing, Korean authorities conducted rigorous epidemiological investigations in accordance with legal procedure, using credit card transactions, CCTV recordings and GPS data on mobile phones when necessary. With testing, patients are classified according to severity and directed towards appropriate treatment paths at hospitals for severe cases and living and treatment support centres for milder cases. Health care resources and organisation were adjusted in response to the pandemic.

Source: (OECD, 2020[5]); (Assembly, 2021[6]).

However, in a crisis where much of the evidence is incomplete, uncertain and information is evolving rapidly, it has been particularly challenging to anticipate, analyse and thoroughly discuss the impacts of regulations, let alone co-operate on or align policy approaches internationally to face a global crisis. The urgent need for governments to develop public health measures has consequently left little room for them to carry out comprehensive stakeholder consultations or consider alternative regulatory or non-regulatory options in the policy-making process. Furthermore, reliable data on the rates of infection and fatality are sorely lacking and existing policies may be getting in the way of gathering information that will be essential for developing sound policy responses (Dudley, 2020[7]). Moreover, securing the timely and unrestricted access to reliable data sources (e.g. as open data) has become a matter of digital solidarity in light of the global scale of the pandemic (OECD, 2020[5]). Urgency has limited the capacity for more deliberative forms of policy making involving the use of regulatory management tools and practices, such as RIA and stakeholder engagement (see also Chapter 2).

This does not mean that emergency regulations should forgo some, although in some cases lighter, scrutiny of their impacts and effectiveness. A well-designed regulatory system can adhere to recommendations on regulatory policy and governance (in particular, the 2012 Recommendation), even in a crisis. Furthermore, once the immediate pressure from the crisis is over, regulations adopted through fast-track procedures can be subjected to careful ex post, or post-implementation reviews (PIR) in order to examine their impacts and effectiveness. Economic regulators can play an important role to support these efforts through their collection of data and their knowledge on sectors (see Chapter 5) It is also particularly important that governments possess robust and adequately resourced regulatory oversight bodies, which will play a crucial role in ensuring better regulation habits do not fall in priority following the crisis.

Looking ahead – a glance to the future of regulation

The COVID-19 pandemic has wrought economic and social disruption worldwide. As governments seek to rebuild afresh, they must ensure that the innovative policies that will power economic growth and solve the world’s most pressing social and environmental challenges are not held back by regulations designed for the past. The various challenges faced by governments raise a strong need to develop pioneering and agile regulatory policies, harnessing, inter alia, the opportunities provided by digital technologies.

Leveraging and adapting regulatory management tools to increase agility, quality and coherence of the rulemaking system

Adapting regulatory management tools

Every regulation is inevitably an experiment. Some regulations deliver the desired benefits, some do not and need to be amended or repealed. Regulatory management tools such as RIA, stakeholder engagement and ex post reviews of the stock of regulations provide important opportunities to consider the whole portfolio of potential solutions, analyse their impact, consult with all stakeholders, monitor compliance with and evaluate performance of regulations. They have been playing the central role in the efforts to achieve regulatory outcomes since the very beginning and will remain a crucial part of regulatory policy in the future. However, these tools need to be adapted and their implementation must be improved to help governments navigate the challenges and the opportunities brought by transformative changes and choose the right regulatory (or non-regulatory) approaches in achieving government objectives.

According to the results of the previous iREG surveys, and confirmed by the one carried out in 2020, RIA is still in many countries carried out late in the regulation-making process, in many cases only used to justify the solution that has already been selected. This goes against the main purpose of RIA – a rigorous process that critically examines alternatives to a given policy problem, providing for inherent trade-offs and ultimately highlighting the option that will maximise the benefits for society while minimising costs. The process of impact assessment needs to go hand-in-hand with the process of developing a policy proposal and start at the inception of this process when identifying the problem to be solved and the objectives to be achieved (OECD, 2020[8]). How to achieve this, how to make RIA a firm part of the daily work of civil servants and policy-maker will be one of the main challenges for the upcoming years.

To identify the right option, officials need to take into account the whole portfolio of potential solutions, both regulatory and non-regulatory (OECD, 2020[8]). Administrations need to get rid of the “regulatory reflex” – opting for a regulatory solution wherever there seems to be an issue requiring a government intervention. Guidance and training on the use of alternatives to regulatory tools need to be improved, officials must be motivated to examine alternative solutions wherever this might be beneficial and regulatory oversight bodies need to play a stronger role in promoting the use of such solutions. Using approaches such as outcome-oriented regulations, co-regulations, standard-setting or leaving space for self-regulation has to become more common in order to permit more flexibility in response to the fast-pace of technological changes. International experience and instruments need to be viewed more systematically as a fundamental pillar of domestic rulemaking. For this, learning governments’ approaches to similar challenges in other jurisdictions or at the international level can be a valuable step in identifying the right regulatory or non-regulatory option.

One of the likely effects of the COVID-19 pandemic is that regulators might be operating in an environment with increased uncertainty in the future. The techniques such as problem definition or analysis of impacts might therefore need to be adjusted as well. When defining the problem to be solved, officials will have to take into account that various problems might have significantly different impacts on various groups of stakeholders (e.g. youth, elderly people, women, SMEs) or sectors of the economy (tourism, hospitality). In the phase of evaluating impacts, the uncertainties regarding potential effects of the adopted measures must be taken into account as well. RIA, envisaged as a tool to maximise the benefit/cost ratio, could also represent one tool helping select the solution that will lead to the desired effects and outcomes (OECD, 2020[9]).

Stakeholders might play a crucial role in identifying optimal solutions. Stakeholder consultation is not only about identifying optimal solutions, but also giving citizens the opportunity to weigh in on trade-offs and value preferences to help manoeuvre the new ethical and distributional challenges that arise from new technologies and technologically-driven business models. For this, it is important that stakeholders are systematically consulted and engaged in the regulation-making process from the early stages (see Further shift from public consultations to stakeholder engagement).

Furthermore, once the immediate pressure from the crisis is over, regulations adopted through fast-track procedures will have to be subjected to careful ex post, or post-implementation reviews (PIR) in order to examine their effectiveness. It will be necessary to adapt the ex post review processes to make sure that a significant backlog of regulations to be reviewed is avoided. This would involve prioritisation while making sure that measures adopted as temporary will not become permanent. The use of sunsetting clauses and expiry dates will probably become more frequent.

It is also particularly important that governments possess robust and adequately resourced regulatory oversight bodies, which will play a crucial role in ensuring that better regulation habits do not fall in priority in a time of crisis. They will potentially play an important role in extracting lessons learned and promoting the adoption of innovative approaches to regulatory management; as well as helping prioritise ex post review efforts and ensuring that relevant evidence from implementation is collected and assessed.

Increasing regulatory coherence, aligning regulatory governance with strategic governmental goals

Regulatory coherence refers to the use of good regulatory practices in the process of planning, designing, issuing, implementing, and reviewing regulatory measures in order to facilitate achievement of domestic policy objectives, and in efforts across governments to enhance regulatory co-operation in order to further those objectives and promote international trade and investment, economic growth and employment.

At the national level, regulatory management tools help to ensure that regulations are aligned with the overall political objectives expressed in government’s manifestos, programme statements, coalition agreements, etc. RIA is a crucial tool in achieving regulatory coherence. For this, it is necessary that, in the phase of problem identification and especially defining the objectives of the government interventions, officials take into account the existing political environment and to what extent the examined alternative solutions fit into the more general objectives of the government. Some kind of “light RIA” might be carried out already at the stage of defining government objectives to make sure that they are achievable and, in some cases, not a sub-optimal ways of dealing with a given problem. This aspect should then play an important role along with fitness-for purpose and cost-effective ratio in selecting the efficient solution.

The COVID-19 crisis has put in the spotlight the threats and harms to health and economy, but does not reduce the urgency of addressing environmental threats to global prosperity and well-being. The need to address the climate change and sustainability will thus remain once this crisis abates. As mentioned earlier, regulatory policy is rarely used to its full potential in achieving current priority goals for governments across the globe, such as the Sustainable Development Goals, fighting climate change, aging population or supporting inclusive growth. To change this, it is necessary to focus on tools that have potential in improving policy coherence and helping governments in achieving their goals as well as, drawing from the experience of the COVID-19 crisis for instance, ensure that business costs related to regulation are kept limited. This would include the ones of sustainable development, through optimisation of policy responses to the defined problems, be it social injustice or climate change.

Sound public policies grounded in evidence – and implemented effectively – will be crucial for the achievement of the 2030 Agenda. By fully reflecting SDGs in the regulatory framework, governments can enhance public sector’s capacity to consistently formulate, implement, and monitor policies coherent with the 2030 Agenda for Sustainable Development across sectors. To this end, governments should make use of regulatory management tools at all stages of the regulatory policy cycle. While embedding SDG considerations at the ex ante impact assessment stage is crucial for the development of new legislation positively impacting SDG achievement, conducting retrospective reviews through an SDG lens is equally important to ensure the existing stock of legislation is in line with the goals of the 2030 Agenda. Engaging relevant stakeholders, like NGOs and research institutions, helps to ensure the latest scientific insights regarding SDGs are reflected in policy making.

Crises such as the COVID-19 pandemic require a coherent policy response. This, of course, includes introducing coherent regulatory measures. Such coherence must be achieved among various institutions at the central level of government, across different levels of administration, including between federal, state, regional and municipal levels of government but, nonetheless importantly, also at the international level through IRC (see Chapter 4).

Indeed, the inherently global consequences of the COVID-19 pandemic highlighted that no policy maker could act in isolation, that to be effective, domestic regulators and policy makers had much to learn from foreign authorities and to gain from joining up approaches. Governments therefore made important efforts to share knowledge and experience in designing the right policies in this context, to guarantee the resilience of global value chains especially in essential food or medical products, and to ensure the interoperability of services such as international travel or internet access. At the same time, the urgent needs for co-operation at the heights of the crisis highlighted the importance of embedding IRC systematically in regulatory frameworks to be able to mobilise in time for future emergencies, and to work together towards preventing future crisis (see Chapter 4).

Again, regulatory oversight bodies need to play a more proactive role in assessing whether the quality of draft regulations are coherent with government objectives (see Chapter 3).

Removing regulatory “sludge” and “deadwood” for better recovery

Setting up clear and predictable administrative procedures is important to achieve regulatory objectives. At the same time, procedures can be an important source of administrative burdens (or regulatory “sludge”4) which might be difficult to justify in the times when setting up and operating a bank account might be done remotely without even visiting the bank. Governments should over time review their administrative procedures and, to the extent possible, try to streamline them to make it easier to comply with the obligations set by these procedures. In many countries, the COVID-19 pandemic forced governments to speed up digitalisation of government services.

To make it easier for regulated subjects to comply with administrative procedures, governments should create one-stop shops (OECD, 2020[10]) through which it will be possible to deal with most of the government services, if possible using remote access and ensure the application of the once-only principle (asking for information only once and sharing it between administrative services), aiming at reducing the administrative burden on citizen and businesses. Also, excessive reporting might not be necessary whenever data might be collected, processed and shared among government institutions using modern technologies (OECD, 2019[11]).

The COVID-19 pandemic contributed to the digital transformation of government operations in many aspects. What seemed to be – or was claimed to be – impossible had to be done in a matter of months or even weeks. Public communication and service provision between governments on one side and businesses, citizens and organisations on the other revealed in some cases unjustified complexity of certain administrative procedures but also surfaced the value of “Government as a Platform” ecosystems to help identify user needs and develop new services in response to crises. It has also proven that digital transformation and digital government efforts must in the future go hand-in-hand with the revision of administrative procedures and design of services with a view to their simplification and reduction of unnecessary administrative burdens as government becomes more proactive and user-driven.

In a post-COVID world, it will also be necessary to restart economies that were partially put on standby during lockdown periods. The recovery programmes should include systemic reviews of regulations, especially those affecting businesses. Even during the crisis, governments waived hundreds of regulations and administrative procedures. Governments have, for example lifted rules against restaurant deliveries and all sorts of permit regulations that were preventing people from working while under lockdown. A more systemic review of unnecessarily burdensome regulations should be put on the agenda of all administrations which want their businesses to flourish again and see new ones created (ref to forthcoming Working Paper on competitiveness impacts of regulation). Special regimes for SMEs and/or better analysis of impacts on small and microenterprises and considering exemptions for those companies should also form part of the recovery strategy.5 The new technologies, possibilities in collecting and processing large volumes of data, might make this process more structured and evidence-based. It is however, necessary that administrations clearly define the data they will need for monitoring and reviewing regulations already at the stage of development of regulations.

Thinking differently: Adopting behaviourally-informed approaches to regulatory governance

The future of regulation also requires governments to take a step back and think critically at how regulations are made. Over the last decade, practitioners and policy makers applying behavioural insights (BI) to regulatory policy making have demonstrated it success as a tool for supporting new approaches to policy making (i.e. (Lunn, 2014[12]); (OECD, 2017[13]) and (OECD, 2019[1])). While applied mostly to individuals, often in consumer choice situations, the BI approach has worked alongside other innovative approaches to discover policy solutions not usually considered in the traditional approaches to policy making.

As part of its evolution, BI practitioners and policy makers have been expanding its use to new frontiers in an effort to both mainstream the practice and support better outcomes for the whole of society. For regulatory policy, this has included a shift from individuals to organisations – where the interaction between regulators and regulated entities influence outcomes (OECD, 2020[14]). This research has demonstrated that organisations can be influenced by behaviourally-informed approaches.

Building off this success, a key element of this forward-looking agenda is investigating how BI can improve the effectiveness and efficiency of system of regulatory policy making – or “regulatory governance”. This follows from the OECD (2012[15]) Recommendation, which develops a governance framework for regulatory policy making that seeks to deliver ongoing improvements to regulatory quality. This framework elaborates a system of institutions, processes and tools that, when functioning properly, help support better regulatory decision making. If BI has worked to improve regulatory decisions, i.e. the outcomes of policy making, then what impact can it have on the institutions, processes and tools that create these policies? The OECD (2021, forthcoming[16]) has produced a working paper examining this question, and its key findings are presented below.

Why we need to consider behaviours in regulatory governance

Behaviour change is one of the goals of regulation. This can be achieved through trying to promote a certain action (i.e. purchasing healthier food) or outcomes (i.e. a healthier society) or dissuade others (i.e. limiting the rise in health care costs). To achieve this goal, regulatory policies are traditionally derived from highly generalised and powerful deductive models of human behaviour and decision-making (Lunn, 2014[12]). These models often rely on a number of assumptions of human behaviour, such as the “rational actor” model for economic regulation. Policy makers often then use these assumptions of humans’ decision-making to build policy responses.

However, the field of BI has demonstrated that social context and behavioural biases systematically influence people’s abilities to act in predictable ways (OECD, 2019[1]). BI offers a clear methodology for policy makers to analyse policy problems based on lessons derived from the behavioural and social sciences, collecting evidence of which solutions work (and which do not), and applying these findings to improving the outcomes of public policy. These applications have largely been towards changing individual behaviour, often at the implementation stage of policy making to improve non-behaviourally informed policies. New research is exploring BI applied to changing the behaviour of organisations, including both regulators inside government and regulated entities in the market (OECD, 2019[17]); (OECD, 2020[14]).

A new paradigm is emerging called “behavioural public choice” (Lucas and Tasić, 2015[18]); (Viscusi and Gayer, 2015[19]) that raises normative arguments in favour of applying BI to the institutions, processes and tools that form the framework of regulatory governance. The roots for this theory can be found as far back as Niskanen (1971[20]), noting biases in bureaucratic processes, and more recent political economy arguments, such as public choice, that present evidence behind government failures based on failures to rationalise (i.e. (Tullock, Seldon and Lo Brady, 2002[21]), as cited in (Viscusi and Gayer, 2015[19])). What behavioural public choice theory adds is a model whereby psychological biases can be used to analyse government failures and offer different solutions in response.

The core argument for behavioural public choice theory is the realisation that governments are increasingly using behavioural sciences to intervene via policy decisions, while not taking into account that policy makers and regulatory themselves are subject to the same biases and barriers as any other individual (Viscusi and Gayer, 2015[19]). This ultimately impacts the efficiency and effectiveness of institutions, processes and tools. In fact, governments tend to “institutionalise rather than overcome behavioural anomalies” (Viscusi and Gayer, 2015, p. 40[19]), including failures in risk perception and risk assessment that can lead to an over application of the precautionary principles leading to excessive regulation or a failure to realise that regulation is needed at all.

For example, cost-benefit analyses treat losses and gains equally. However, a well-founded axiom of behavioural science is that humans weigh losses more heavily than equivalent gains (Kahneman and Tversky, 1979[22]), which can lead to more risk-adverse behaviour. As Viscusi and Gayer (Viscusi and Gayer, 2015[19]) note, if for instance, the Hippocratic Oath for doctors is “first, do not harm” then this will set the tone for medical regulators to more emphasis on losses than gains, which may prevent some drugs from being approved. In other cases, regulatory agencies may develop “tunnel vision” that result in policy makers sticking with certain processes and tools, resulting in inconsistent and inefficient outcomes.

In short, the inability of individuals within government to rationalise because of behavioural factors is an important source of government failure (Lucas and Tasić, 2015[18]). The behavioural public choice perspective is therefore a call to symmetrically apply behavioural insights to both the regulators and the regulated entities (Thomas, 2019[23]). In other words, since government is created and run by humans, who experience the same biases and barriers as anyone else, there is good reason to look at the ways behavioural science can help government run more effectively.

This suggests a couple different implications for policy making. First, decisions by regulators are, at least some of the time, systematically biased and this can result in sub-optimal policy decisions. Second, more than just biased decision making, it suggests that there are behavioural barriers that prevent regulators from using effectively the tools and processes of regulatory policy making to support better regulatory policy outcomes, such as intention-action gaps or other friction costs. Thus, regulators and the regulatory process can benefit from identifying and reducing behavioural biases and barriers, and supporting follow-through on good intentions. This paradigm gives new entry points for BI to help support better regulatory policy making that moves beyond implementation towards supporting the broader governance of public organisations through change and reform management.

Using BI to support the use of regulatory management tools

Behavioural public choice has important implications for the use of regulatory management tools in promoting better regulation. OECD (2021, forthcoming[16]) research suggests several new approaches to identifying behavioural biases and barriers that affect use of regulatory impact assessment, stakeholder engagement and ex post evaluation, as well as proposes possible behaviourally-informed solutions to overcome them. These can be summarised into four categories, based on OECD (2019[1]):

1. Attention: Help regulators focus on using regulatory management tools effectively. This includes reducing cognitive limitations and myopia through the smart use of reminders and defaults.

2. Belief: Support regulators in updating their belief about the utility of the tools, and therefore their motivation to use them. Implementation intentions can help bridge intention-action gaps, as well as leveraging loss aversion by highlighting the risk of not using the tools.

3. Choice: Assist regulator’s choice about specific ways to use the tools by addressing problems of group think and status quo bias through diversified work teams and deliberation structures that encourage debate.

4. Determination: Encourage regulators to continue using these tools over time by addressing barriers such as perverse social norms and perceived lack of autonomy in decision making. Demonstrating improvement and changes to the tool over time can provide structure while enhancing autonomy.

The above list is non-exhaustive and derived from discussions with the regulatory policy making community in an attempt to place focus on important areas that have been highlighted as pertinent to the use of regulatory management tools. They provide a good starting point for research into practical ways to use BI to improved use of these tools.

More broadly, there is also opportunity to use the BI methodology itself to improve the analysis conducted as part of regulatory management tools. The point of these tools is to gather and use information to better inform regulatory decision making. The BI methodology is a complementary tool that similarly seeks to gather evidence, but does so through an experimental approach. This seeks to “de-bias” the evidence collection, analysis and decision-making process by providing evidence of actual – as opposed to assumed – human behaviour, and use that evidence to make policy.

It can also help uncover “behavioural failures” (Viscusi and Gayer, 2015[19]) that depart from the individual rationality assumed in economic models and can provide additional justification for intervention in certain cases (Congdon, Kling and Mullainathan, 2011[24]). This allows policy makers to consider behaviourally-informed solutions alongside the traditional policy responses in a way that augments and elevates the decision by opening the door to other regulatory and non-regulatory options. The may be especially powerful in the context of ex post review, which can permit more time to conduct robust experimental evaluations of potential behavioural issues that can ultimately drive new design cycles.

Growing importance of regulatory oversight

As mentioned above, the role of regulatory oversight bodies (ROB) will probably become more important in the future. As evidence shows (Ladegaard, P., P. Lundkvist and J. Kamkhaji, 2018[25]), a well-functioning oversight is a sine qua non condition for effective implementation of regulatory policies. ROBs will have to play a more active role in co-ordinating implementation of regulatory management tools, acting as advocates of regulatory policy, gatekeepers overseeing quality of regulations and the use of regulatory management tools in their development, implementation and review. More and more, ROBs have also have to offer their helping hand to ministers and other agencies supposed to use regulatory management tools in their work.

Promoting such change can be tough for many people to handle, and changing the behaviour of large organisations such as bureaucracies can be even harder. However, there is evidence which suggests that understanding the behavioural drivers of change management can help make implementing such reforms easier and more effective. The previous section discussed this with regards to regulatory management tools, but it can also apply to how oversight is conducted.

Behavioural public choice also provide ways to improve regulatory oversight. OECD (2021, forthcoming[16]) finds five aspects of ROB’s roles and structure that may enhance the importance of behavioural insights. These include the tendency of organisational path dependency, different levels of public scrutiny, the location of the ROB relative to government decision making, the role of ROBs as both generalists and specialists, and pressures they face being “in between” public servants and decision makers.

Better focus on regulatory delivery for achieving regulatory outcomes

The use of the term “regulatory delivery” is not only descriptive but also stresses a paradigm shift that views the relationship between regulatory delivery institutions and regulated entities differently from traditional regulatory implementation focused on more “sanctions-oriented” inspections and enforcement (Russell Graham and Hodges Christopher, 2019[26]). It seeks to cover the whole spectrum and wide range of activities and actions, measures, processes used to secure the implementation of regulations in practice.

This shift has been occurring over the last two decades with major restructuring and consolidation of inspection services in a number of countries, including Estonia, Lithuania, the Netherlands, Slovenia and the UK. This trend has continued, with a number of institutional reforms aiming at ensuring better regulatory outcomes and increased efficiency (see Chapter 6).

This situation, combined with other research on specific countries, regulatory areas, etc., suggests that path dependency is important, and that there is a lack of regular, systematic reconsideration of the risks addressed by regulatory delivery structures and resources (Blanc, 2012[27]) (Blanc, 2018[28]). This has contributed to extremely complex, convoluted institutional landscapes (as directly observed when collecting the data, the difficulty of which came precisely from the vast number of institutions with overlapping or mixed functions, frequent unavailability of precise numbers on inspecting staff, etc.), and made resource allocation and expenditure very difficult to track and assess, and mostly unrelated to risk analysis or assessment. From this perspective, the path towards truly risk-based, risk-focused, and risk-proportional regulatory delivery is still a very long one. Nonetheless, important progress has been made, and major initiatives taken in recent years to improve the situation, which are detailed in the following section of this chapter.

One such example is that of the Environmental Evaluation and Enforcement Agency of Peru (OEFA), which was recently the subject of the first OECD assessment based on the criteria laid down in the 2018 OECD Regulatory Enforcement and Inspections Toolkit (OECD, 2018[29]).

In practice, this has meant a new focus on a broad spectrum of relevant tools, activities and actions, as well as it stressing a more supportive relationship building approach. It highlights an active role of state institutions in informing and guiding regulated subjects, to support them to understand the rules that apply to them, what they mean and intent to achieve and why, and how they should/can be implemented. The default assumption is no longer that non-compliance is deliberate, but rather that it is highly likely to result from lack of knowledge, incomprehension, wrong interpretation, or technical and/or financial incapability to comply with rules – and the state has a crucial role (and a duty) to play in helping regulated subjects comply and manage and mitigate risks to the public welfare (Blanc, 2021[30]).

A fundamental basis for building a regulatory delivery approach to implementation is to consider the behavioural drivers of (non-)compliance. It is premised on understanding why people behave in a certain manner – and what can work in a specific case. This is based on extensive research6 which shows that regulated subjects do not act exactly as prescribed by rules, nor are driven merely by interest and fear. Also, compliance does not automatically result in regulatory goals being achieved, because rules are not optimally designed (see Box 1.5).

Rather, compliance and risk-mitigating behaviour is actually constrained by four key groups of behavioural drivers that state agencies must effectively use to deliver regulation (Blanc, 2018[28]):

• Capacity, i.e. knowledge, financial and technical ability;

• Deterrence, i.e. fear of negative reputation and sanctions;

• Individual moral values and dominant social and cultural drivers; and,

• Legitimacy of authorities, and perceived procedural fairness.

Of those four, increasing the perceived procedural fairness is essential to boost voluntary compliance as it greatly contributes to building trust in the regulatory system and the legitimacy of regulators. The concept of procedural fairness is built upon four key tenants (Tyler, 2003[31]):

1. Ensuring that regulatory officers behave in a thoroughly respectful way;

2. Giving a “voice” to regulated individuals/entities to explain their circumstances, issues, challenges, expectations etc., as well as demonstrating that these are taken into account as much as possible;

3. At all stages, explaining to regulated individuals/entities what the rules and processes are, what is the goal of the regulation, how they are being applied etc.; and,

4. Consistently demonstrating that rules and procedures exist to avoid conflicts of interest on the regulator’s side, and that best efforts are made to effectively avoid such conflicts.

Using the tenets of procedural fairness increases the professionalism and technical competence of the regulatory delivery institution, promotes an approach that is based on proportionality and risk, and seeks interaction with regulated entities that promotes and strengthens trust while using sanctions as a last resort (see Box 1.4).

Box 1.4. Improving compliance and risk management with procedural fairness in practice

The Netherlands’ Inspectorate for Health and Youth Care (IGJ) has placed an important focus on consulting stakeholders and uses their input in its work. For instance, the IGJ monitors how hospitals learn from sentinel events, with the idea that it should lead to social and participative learning at the local level (de Kam et al., 2020[32]). The IGJ also conducted systematic research on patients and family involvement, showing advantages (increased quality of regulation, increased legitimacy, perceived justice for those affected, and empowerment) but also challenges (how to incorporate the input of users in decisions, the fact that not all users want to be involved, time and costs required, organisational procedures standing in the way etc.) (Wiig et al., 2020[33]).

In recent years, many initiatives tried to make regulation more accessible and understandable, particularly for small businesses in the food industry. For instance, since 2017 the Veneto Region in Italy has developed a series of detailed manuals for small, local producers, particularly in “traditional” food specialties. The Canadian Food Inspection Agency supports food businesses in understanding and applying the 2019 Safe Food for Canadians Regulations through a comprehensive Toolkit for businesses, which takes them through all aspects of the regulations, both in terms of substantive requirements and of processes. Such tools, by explaining the rules, their rationale, and how they are applied, not only improve knowledge – but also willingness to comply, through a perception of increased fairness.

Source: OECD research.

Ethical business regulation

A related approach, Ethical Business Regulation (EBR), is becoming an increasingly popular way of achieving better regulatory delivery principles. EBR is a behaviourally-focused tool that seeks to use flexible, outcomes-oriented approaches to delivering regulations. The idea underpinning EBR is that “regulating with rules” is bound to always under-perform, since the primary driver of behaviour inside corporations is not rules or deterrence through enforcement but rather culture (Hodges, 2015[34]). EBR does not exclude the use of rules and sanctions, particularly for businesses and individuals that behave clearly unethically, but acknowledges that rules and deterrence are bound to achieve disappointing results if they are seen as the primary instrument to reach regulatory objectives.

From an EBR perspective, regulators assess the internal culture of firms, and engage in a co-operative approach if this culture is fundamentally sound and conducive to achieving the goals of regulation. This creates positive incentives for firms that are “on the edge” to change their culture, and the regulator’s role is to provide guidance on how to do so. For firms that refuse to follow an ethical path, the regulator reverts to strict enforcement of rules and sanctions. In a sense, EBR reformulates a flexible and responsive approach that has long been used by a number of regulators, but in a more coherent and “culture-focused” framework (see Box 1.5).

Box 1.5. Ethical business regulation

An ethical and fair culture, whether within an organisation or in a regulatory enforcement regime, has to distinguish between people who are essentially trying to do the right thing and those who are not. It is important that enforcement responses are fair and proportionate. Part of this is ensuring that the responsibility is attributed to the highest relevant level of management within an organisation, rather than the foot soldier who may be a victim of the system or of wilfully blind or ‘immoral’ management. Thus, if people engage in activity that is criminal, people expect to see the law upheld and for there to be a proportionate response. But where people have been trying to do the right thing, or have been generally, but not wilfully, ignorant about how to do things, adopting a punitive response would be seen as unfair, and hence would undermine general willingness to comply.

The culture should involve accountability to share all relevant information on a no-blame basis, so that the data on which performance, improvement and innovation can be based will be maximised. If a no-blame culture is to be effective, it must exist across all relevant aspects, including employment relationships, systemic regulation, professional regulation, and business units.

Source: C. Hodges, Ethical Business Regulation: Understanding the Evidence, report to the UK Better Regulation Delivery Office, 2016, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/497539/16-113-ethical-business-regulation.pdf.

Finally, ongoing research by the OECD Secretariat on regulatory delivery institution shows that path dependency is still largely the predominant force that shapes regulatory delivery structures, institutional mandates, resources etc. There has, to date, been relatively few experiments of systematically reviewing and revising these, re‑assessing existing structures and resources against current risks and their respective salience. Identifying duplications and conflicts of competence, as well as mapping all resources involved in a given regulatory field, can be important steps towards further improvements in regulatory delivery (see Chapter 6 for more details).

The need for risk-based, professional, flexible regulatory delivery

One of the challenges to both the development of new technologies and the effective regulation of new, technologically-enabled or technologically-transformed economic activities, is the over-reliance on excessively prescriptive and detailed rules. The impossibility of achieving an “optimal” precision of rules has been convincingly demonstrated decades ago, and the unavoidable distance between rules, compliance and results has likewise long been known (Diver, 1983[35]); (Baldwin, 1990[36]); (Ogus, 1994[37]); (Baldwin, 1990[36]). What this means in practice is that rules, because the full extent and characteristics of all possible situations can never be predicted in advance, will always be either “over-prescriptive” (forbid or mandate too much, ruling out some activities that would actually be desirable) or “under-prescriptive” (fail to forbid some harmful activities). This impossibility of “optimal” rules means that risk-based, accountable, professionally-grounded discretion at the regulatory delivery and enforcement stage is unavoidable if one is to achieve the desired regulatory objectives (Box 1.6 and (Wetenschappelijke Raad voor het Regeringsbeleid, 2013[38])7).

Box 1.6. The impossibility of optimal rules

Regulations are not self-executing, and there are no such things as optimal rules (Stokes, 2010[39]). This fact, which has been emphasised by scientific research (started in 1983 by Diver who stressed first “the dissatisfaction with the precision of administrative rules, because of either administrative under precision or excessive regulatory rigidity”) and in international experience, presents a number of challenges when it comes to regulatory delivery (Diver, 1983[35]). While norms are key for regulatory delivery work, all types of mandatory norms (“target”, “performance” or “specification”) have limits – those easier to check and enforce tend to also be least directly connected to the anticipated outcomes, and the purely “outcomes-based” ones are least connected to economic operators’ actions, which makes them more difficult to enforce (Ogus, 1994[37]).

“Target” norms, in the first place, make unlawful the origins of certain harms. In theory, they impose the least burden on the economic operators and are more appealing in terms of economic efficiency and innovation, while allow also for greatest flexibility. However, they do not indicate how businesses should perform their activities, nor do they address intermediary outcomes. This creates difficulties, inter alia by making causal relationships between specific economic activities and the harms addressed by the norms difficult to prove, and by creating uncertainty on determining what performance will constitute compliance.

“Performance” norms prescribe what should be direct outcomes of economic activities. As they focus on intermediate outcomes, they do not prescribe the specifics of the operations. While they ensure better certainty to economic operators, they also leave sizeable room for technological innovation, and flexibility. Yet, they can somewhat fail in preventing or mitigating harms as they do not focus on the final harms that the norms aim at lessening.

Finally, “specification” norms specify how an economic activity should be performed. While they are easier to handle both for regulatory delivery agencies and for small businesses they structurally lead to “errors of inclusiveness”, which “discourage desirable activity (through over-inclusiveness) or […] fail to rule out undesirable activity (through under-inclusiveness)” (Baldwin, 1995[40]); (Diver, 1983[35]). High technological rigidity, the possibility to measure compliance only through on-site controls and high potential discrepancy between compliance and achievement of targeted outcomes are among their disadvantages.

It is thus crucial not to consider rules in isolation, but with their enforcement process. This involves matters of “form, force and type of sanction” as well as how the problems of inclusiveness may be dealt over the process of achieving compliance (Baldwin, 1995[40]). Use of (framed) discretion and selective and responsive enforcement by regulatory delivery agencies are therefore crucial to effectively prevent risks, as is considering which enforcement tools and methods will be used.1

1. In practice, even very specific and precise norms end up not working uniformly in practice because of differences in enforcement methods – e.g. whether an agency applies a “zero tolerance” or a “risk-proportionate” approach: (Blanc, 2018[28]).

Source: (Blanc, 2021[30]).

Applied specifically to the challenges raised by technological transformation, the impossibility of optimal rules means that may either completely fail to prepare for the new challenges and risks created or increased by these technologies, or on the contrary prohibit a range of new activities and products that could in fact be desirable – or, quite possibly, both at the same time. This is particularly visible in the case of administrative procedures, such as permitting and licensing rules. The emergence of “ride-hailing” apps led to the question of whether they were allowed under applicable rules governing taxis and drivers-for-hire, and how they could or should (or not) apply for a permit, based on existing requirements and processes. Rather, good regulation in such a case would mean asking what the risks from such activities can be, how they can best be addressed, whether the current processes are fit-for-purpose, and what should be changed in order to ensure the best possible public welfare outcomes given a new situation.

Risk-based regulation (see Chapter 6) means analysing risks to understand their roots and mechanisms, assessing the levels of different risks, and managing risks through a variety of measures. This, in turn, means using the risk angle both when developing an drafting rules, when allocating resources to different institutions or sectors, when determining licensing requirements or targeting inspection visits, or when applying sanctions. Risk is a cross-cutting notion that should be used as the foundation of the regulatory system. Moving away from an approach that is tightly focused on the letter of the rules, and attempts to constantly reduce margins of discretion of regulatory staff is necessary to avoid such pitfalls, where regulation leaves society worse off through a combination of barriers to innovation and ineffective management of risks (see Chapter 6). Regulations address a number of different potential harms (bodily, environmental, financial etc.), not all of which are of equal seriousness – in particular, reversibility or its absence creates a key difference. Likewise, regulation addresses many hazards – industrial pollution and explosions, food poisoning, building fires and collapses, marketing fraud, tax evasion etc. Again, not all of these are of the same severity, and the likelihood of each of these actually happening varies greatly. Thus, comparing the level of priority of regulating different, but also different economic sectors or establishments, based on the harm caused, is inherently difficult.

Risk can allow to consider allocation of resources at a strategic level (between different domains such as environmental protection, food safety, state revenue, technical safety etc.), even though this is rarely done – as well as to prioritise regulatory interventions in a given domain, between different economic sectors and establishments, which is a much more frequent practice. In this way, risk can function as a kind of common measurement unit, allowing easy conversion and comparison of the relative “value” of different regulatory interventions in terms of lives saved, environmental impact, economic impact etc. – but this is only possible if a common approach to risk assessment across regulatory domains and sectors exists.

Comparing the relative levels of risk, and deciding on the appropriate type and intensity of regulatory response, requires having gone through risk assessment – i.e. estimating the relative level of different risks in terms of combined probability and severity of harm. To allow full comparison across different regulatory domains, not only should there be a unified approach for risk assessment – but also a method to convert different types of harm. While this is theoretically possible (there exist many approaches in law and economics to estimate the economic value of life, health, the environment etc.), it is rarely done in practice with that level of precision. Most often, comparisons of risk levels are done within a given category of harm – e.g. potential losses of life, or potential financial losses. In any case, regardless of the level and scope to which risk is applied, it is an instrument of comparison, and thus prioritisation.

Finally, while risk prioritisation done solely by sector or type of activity can be a useful first step of improvement in situations where risk assessment is starting “from scratch” and with limited or no data to support the exercise, it is not optimal, and insufficient in the longer run. In advanced economies, and where data needed for risk analysis and prioritisation are available to regulatory delivery authorities, a more differentiated approach to risk assessment and targeting can be expected – e.g. so as to be applied to each business entity or object (facility, establishment) individually, based on inherent characteristics and track record.

Why risk matters: the importance of prioritisation, and proportionality

This should not mean, of course, that regulators and regulatory staff are vested with arbitrary powers, and that economic operators and citizens do not have appropriate protections. The use of discretion should aim at a responsive, compliance-promoting approach, and be grounded in principles of risk-proportionality, accountability and transparency (OECD, 2014[41]) (OECD, 2018[29]) (OECD, 2018[29]). Only if decision-making principles and criteria are clearly communicated can discretion be exercised in a way that safeguards rights and the rule of law.

One way to move forward is to support regulated citizens and business as the bearers of risk in managing the risks they face. This involves working in partnership with all stakeholders able to produce sustained change. Inspectors in Britain’s Health and Safety Executive have long relied on an approach where law is the last resort and they seek to engage with regulated businesses and promote safer practices through a variety of behavioural approaches (i.e. advice, comparisons with others, indication of potential risks and costs, etc.) (Hawkins, 2003[42]). Results show better outcomes (in terms e.g. of fatal and major accidents) than before the change of approach and/or in other sectors not using this new approach to the same extent.8

Harnessing innovation for regulatory delivery

The “delivery” stage of regulation is critical, particularly through smarter enforcement and inspections, which are based on risks and focused on outcomes. As exposed, designing “optimal” rules has always been impossible, and is even more so in a context of rapid change, increasingly complex economic networks etc. – and technology does not change this fundamental point. “Regulation as Code” is a new name, and uses new technology (and increasing computing power), but corresponds to a restrictive view of rules and regulations, which might lead to consider regulatory discretion as an imperfection to be eliminated, and be seen as a way to achieve perfectly predictable and unambiguous rules. In fact, it might not always be feasible nor desirable to have fully “explicit” or “unambiguous” rules, as exposed above (Box 1.6). In many cases some of the ambiguities in existing legislation result from unavoidable political compromises or from the willingness to leave some form of flexibility and discretion to deal with uncertainty (which is inherent when dealing with events and situations which, by definition, have not taken place yet). In addition, transposing or transforming a significant share of rules into code would imply a fundamental shift in regulatory governance, enforcement, and legal proceedings –which, in turn, raises critical questions around the democratic legitimacy to implement and interpret rules outside of clearly determine executive and judicial powers. Outside of narrow, specific cases where this may be suitable (e.g. specific aspects of tax or customs law, of financial regulation, or of eligibility rules for subsidies), such an approach is bound to yield sub-optimal (or even poor) results. Rather, harnessing technological advances to improve regulatory delivery recognises prior good practice, and tries to implement it more broadly and effectively through new technology.

Growing evidence suggests that governments are increasingly incorporating new technologies in a number of ways (see Chapter6, section on Highlights: major initiatives and innovations in risk-based regulation). This involves, in particular, better collection, management, and use of data, so as to assess and respond to risks more effectively, as well as improved use of communication tools. Being a smarter government requires a more forward-thinking approach to the use and integration of information, technology, and innovation in the activities of governing and delivering services (see Box 1.7). Digitising regulatory delivery also raises a number of risks and barriers that should be effectively addressed by governments.

Box 1.7. Digitising regulatory delivery

Many governments have started considering new (digital) technologies to improve enforcement and inspections activities. The increased availability of data on the outcomes arising from different policy interventions that were previously imperfectly observable enables improved monitoring and supervision (e.g. real time and continuous monitoring of compliance), and more effective enforcement of policies. Examples of online licensing and registration of businesses, automated scheduling of inspections, use of drones for surveillance activities, application of machine learning and AI for risk analysis and compliance education are emerging from different jurisdictions around the world. New technologies enable smarter regulatory oversight activities such as risk-based targeting by providing information and knowledge that would allow for proactive actions and response. As such, they can assist regulators in allocating resources efficiently and obtaining results that demonstrate meaningful outcomes. They can also help regulated parties demonstrate compliance thus lowering costs of regulatory burden on businesses.

Examples of such approaches include the use of satellite imagery to monitor environmental compliance (e.g. in Chile), integrated information systems for management of regulatory inspections (Colombia at municipal level, Italy at regional level, HSE in Britain, Serbia, etc.), use of social media data to identify sources of outbreaks and target inspections (local authorities in the US), remote inspections for chemical safety (Finland), remote mining and energy supervision (Peru), integrated data management for environmental regulation (Ireland), etc. Some regulators (e.g. NVWA in the Netherlands) are also looking at using satellite and drone imagery in the future for supervision of primary production in some sectors (e.g. fisheries).

Another area where regulatory delivery needs to become more “digital” is, logically, the regulation of online marketplaces. In recent years, regulators have increasingly engaged with major platforms to achieve better results by relying on the platforms’ own digital tools e.g. in the Netherlands, with the NVWA working with Ebay “Marktplaats”. Germany’s food regulators have made particular efforts to work effectively with online commerce (see G@ZIELT: Safe shopping on the internet, a joint Federal and Länder initiative for control of internet trade in products covered by the Food and Feed Code and tobacco products: https://www.bvl.bund.de/en/remit/gezielt_safe_shopping/gezielt_node.html).

Source: (OECD, 2021[43]) and (Mangalam, 2020[44]).

Need for a shift to allow more dynamic, flexible and technology-neutral approaches to laws and regulation in the face of innovation

As a key policy instrument, regulation offers important opportunities for governments to capitalise on the benefits while mitigating the risks brought by technological transformation. As highlighted above, regulating has become a daunting task in the current environment. Technological innovations fundamentally question the rationale for traditional regulatory approaches and calls for adapted and innovative solutions to solve the transversal challenges to the design, enforcement and governance of regulation. In most cases, the transformative changes brought by innovations have not yet been mirrored by corollary innovations in governance and regulation. Yet, in the face of the challenges brought by technological transformation, governments need to undertake substantial reforms in order to allow more dynamic, flexible and technology-neutral approaches to laws and regulations and their enforcement. This involves several complementary approaches.

In line with the upcoming OECD Recommendation on Agile Regulatory Governance to Harness Innovation, governments should, in particular:

• Develop more flexible, iterative and adaptive ex ante and ex post assessments, capitalising on the opportunities provided by digital technologies to improve the quality of evidence: given the dynamics of digital transformation, regulatory responses cannot afford to be static and need periodic adaptations to keep pace with the transformative changes. Continuous monitoring of the stock of regulations could help governments assess whether regulation remains fit for purpose, effective and deliver the policy objectives and undertake regulatory revisions when necessary;

• Foster coherence and joined-up approaches through effective co-ordination between the supra national, the national and sub-national levels of government to cope with the cross-cutting nature of innovation;

  Develop forward-looking governance frameworks and regulatory approaches to help identify opportunities and risks at an early stage and to steer, under the conditions of trust, the sustainable deployment of technology;

• Extend the traditional regulatory toolbox by incorporating more agile regulatory approaches such as outcome-based regulations, fixed-term regulatory exemptions (e.g. regulatory sandboxes), co-regulation and non-regulatory approaches such as voluntary codes or standards. As highlighted by the OECD Global Conference on Governance Innovation,9 governments and regulators are increasingly considering innovative approaches to support testing and trialing new technologies and capitalising on new technologies (e.g. big data analytics, AI, the Internet of Things, cloud computing, augmented reality, unmanned aerial vehicles, blockchain and open Application Programming Interfaces) to improve the design and delivery of laws and regulations. Approaches that have recently drawn the attention of governments include outcome-focused regulations, innovation offices or regulatory sandboxes (Box 1.8).

• Develop new enforcement strategies to promote compliance: governments should privilege responsive and compliance-promoting approaches to regulatory delivery that are focused on outcomes and based on risk-proportionality rather than focusing primarily on the letter of the rules.

• Use digital technologies to develop innovative approaches that allow for more effective and efficient rulemaking, compliance monitoring and enforcement (e.g. data-driven regulation). As an example, digital technologies can also be leveraged to implement continuous government monitoring of transformative changes and develop adaptive regulations that keep pace with the dynamics of technological transformation. As illustrated by the various technological solutions implemented across countries to improve regulatory capacity during the COVID-19 crisis, digital technologies offer new approaches to governments and regulators for more effective and efficient rulemaking under increased uncertainty (Amaral, Vranic and Lal Das, 2020[45]). In turn, a more agile and refined mix of regulatory and other instruments can help better frame the diffusion of new technologies, to benefit from their opportunities while addressing the concerns they raise in society.

Box 1.8. Some innovative approaches implemented (or contemplated) by governments

• Regulatory sandboxes: pioneered by the UK’s Financial Conduct Authority (FCA), regulatory sandboxes generally refers to a regulatory "safe space" for businesses, enabling them to test innovations with reduced regulatory requirements. As relaxing regulatory requirements can potentially raise additional risks, most regulatory sandboxes operate in a controlled environment which include a number of safeguards. After a defined time period, innovators may apply for an authorisation outside the regulatory sandbox. This regulatory approach has emerged in a range of sectors including finance but also in the transport and the energy sectors.

• Outcome-based regulations: performance or outcome-based regulation usually defines measurable outcomes that regulated firms must achieve. In focusing on outcomes rather than on inputs, it offers flexibility to businesses on how to meet to objectives, as long as they can demonstrate that the desired outcome has been achieved. Such approach theoretically allows regulated entities to choose the most efficient way to achieve the regulatory goal, while lowering compliance costs. Despite the broad enthusiasm outcome-based regimes have recently garnered across countries, it must be underlined that they are certainly not a panacea in all cases. Recent failures (e.g. regulation of diesel engine emissions which led to the Volkswagen scandal) show that it can work poorly, especially when performance cannot be adequately defined, measured, or monitored.

• Innovation offices: several jurisdictions have implemented innovation offices to promote the development of innovation, in particular in financial services. An example is the Estonian Financial Supervision Authority (EFSA), which offers guidance on existing regulatory frameworks to innovators. While, in practice, innovation offices come in many different forms, a common objective is to strengthen the engagement with innovators and develop mutual learning. It offers avenues to anticipate risks and opportunities early on and address them through collaborative processes with businesses.

Note: for the Volkswagen scandal see (Coglianese, 2017[46]). For further information on innovative approaches implemented by governments, see (OECD, 2021[47]).

(Re-)building trust in regulation and regulatory services

Better communication strategies

One of the key causes of risk-aversion, and of losses of trust in the regulatory system, is disappointment related to excessive expectations. All citizens, consumers, media etc. expect too much of regulation and of the regulatory system. To avoid losses of trust and legitimacy, regulators (and their political supervisors) need to be honest and transparent about the limits of regulation: no regulation or regulatory system can entirely avoid risk, regulators are not all-powerful; safety lies primarily with business operators and consumers, and there are trade-offs between more regulatory stringency and other elements of public welfare (Coglianese, 2012[48]). The solution to this problem is the adoption of comprehensive risk communication strategies, which provide the essential links between risk analysis, risk management and the public. A coherent risk communication strategy may be ensured through the development of a risk analysis process, combined with open dialogue amongst all interested parties, (i.e. actively informing the public about the desired objective while disclosing the associated risks in a transparent fashion). To communicate risk effectively, there is a need to understand the target audiences and the challenges they are likely to face in assessing the risk and acting on it. In the current complex communication environment with a multitude of platforms, communicating risk in a controlled and co-ordinated way may of course be a challenge. This is why it is essential for regulators to steer regulated subjects and the public more generally around various issues that exist to find credible sources of information.10

In addition, regulators tend to assume that citizens have no appetite for acknowledging the existence of risks, and therefore often opt for statements that are principally intended to be reassuring, while supposing that the public is risk averse. Recent research has however shown that citizens are a great deal more relaxed about risks than often supposed, whereas the public is often rightly sceptical when risks are played down.11 Regulators should communicate risk, e.g. by organising all sorts of public consultation that are also designed to provide citizens the opportunity to influence the decision-making process, and to prevent excessive disappointment (some of which may unavoidably happen). Citizens’ participation in the regulatory process, and ensuring that they have a good understanding of risks, could prove decisive in setting their expectations, and, subsequently, to avoiding any overreactions – as overreactions are mostly due to a lack of information from, as well as insufficient honesty and transparency of regulators about the limits of regulation. However, even in this case, merely disseminating information without communicating the complexities and uncertainties of risk may be insufficient to ensure effective risk communication.

Box 1.9. The importance of public communication for public trust in regulatory institutions

Given the rise of the number of regulatory agencies and their increasing powers, it is imperative that they are perceived as trustworthy by the public – this not only applies to stakeholder trust, but also to citizen trust. For instance, trust in regulatory agencies is needed for the uptake of their recommendations by citizens and, as a result, regulated entities may feel more pressure to be compliant. Hence, citizen trust in regulatory agencies is crucial to sustain the effectiveness of regulatory agencies that, to a large extent, depend on voluntary compliance by regulated entities. Research carried out on different inspectorates (Health and Youth Care, Education, and Financial Markets) in The Netherlands explores different ways to inform citizens about regulatory, and more specifically, enforcement decisions and their effects on their trust. A survey experiment in a representative sample of the Dutch population of 18 years and older was used to investigate whether decision transparency influenced citizen trust in regulatory agencies.

Overall, the findings of the research suggest that transparency about regulatory decisions can increase citizen trust in a regulatory agency, supporting the Transparency Hypothesis which suggests that the psychological distance may be an important psychological mechanism behind the effect of transparency. At the same time, this effect was found less significant in the case of the financial regulator, which indicates that its magnitude is moderated by characteristics that are specific to the regulatory domain.

The results indicate that something in the nature of a regulatory domain may affect the overall influence of decision transparency on citizen trust. For instance, citizens may be less patient with agencies that supervise private markets, such as financial services, than agencies that supervise a public domain, such as public schools. Another way of thinking about the difference found between the financial regulator and the two inspectorates is their relative distance to ordinary citizens. The nature of the financial regulator’s decisions is less related to the day-to-day problems of ordinary citizens than, for instance, the health and education inspectorate. These inspectorates are more in touch with citizen subjects, such as parents and patients, whereas regulatory agencies like the financial regulator are more in contact with professional stakeholders instead of ordinary citizens. Hence, being more aware of the financial regulator’s decision might be less relevant for citizens.

More broadly, an important implication of this finding is that transparency may be more effective as a trust generating mechanism for organisations that are placed at arm’s length from direct government and political control, such as regulatory agencies. Generally, people do not like political decision-making and being exposed to politicised decision making and bargaining decreases trust. Conversely, transparency in less-politicised organisations could have a relatively positive effect on trust and could even generate trust for some controversial decisions.

Source: excerpts from (Grimmelikhuijsen et al., 2019[49]).

Further shift from public consultations to stakeholder engagement

Stakeholders have a right to express their views as part of the process of developing, implementing, and reviewing regulations (OECD, 2017[50]). Their desire and willingness to influence regulation-making will probably grow in the future. At the same time, to get the best available input and to make the stakeholder engagement process inclusive, it will become more and more important for governments to play a more active role in reaching out and engaging with groups of stakeholders that may have been underrepresented so far, whether it concerns ethnic or sexual minorities, underprivileged groups, or micro-businesses (for more OECD work on Open Government, see http://www.oecd.org/gov/open-government/ and, in particular, the Recommendation of the Council on Open Government12).

To make sure that stakeholders provide meaningful input to the regulation-making process, policy makers need to engage with them regularly and sufficiently early. Regular engagement with stakeholders, be it businesses, NGOs, representatives of certain groups of the society (e.g. youth), etc. is indispensable for creating an environment of mutual trust. Providing complete feedback from the consultation process, i.e. how stakeholders’ input is reflected in the regulation or, if not, providing tangible reasons for why it is not the case. Discussion fora where views on the quality and performance of the regulatory framework are regularly exchanged help administrations to understand the needs of the regulated subjects but also to explain the purpose of existing or new regulations. In some cases, these fora provide not just an opportunity for stakeholders to “complain” about the quality of regulations and regulatory burdens but also to jointly look for solutions (see for example European Medicine’s Agency iSPOC system) or, if necessary, for administrations to explain why certain solutions cannot be accepted. This helps support mutual understanding of what the government is trying to achieve through regulations and potentially increase trust of stakeholders in government regulations and therefore increase compliance with regulatory measures and achieving regulatory outcomes.

Administrations need to be aware of who will be affected by regulations and how. Any groups of stakeholders which might be disproportionately affected should be identified and also consulted with. Preferably, stakeholders should be mapped already at the inception of the process, before the regulations are being drafted. It is the government’s responsibility to give all stakeholder groups an equal opportunity to express their views. This might mean actively reaching out to those who might not have the necessary resources for getting engaged or might not be sufficiently informed on the opportunities to be consulted.

Demonstrating good governance of regulatory institutions

To fulfil their functions, regulatory institutions need to make and implement impartial, objective and evidence-based decisions that will provide predictability to the regulatory regime, inspire trust in public institutions and encourage investment. The governance arrangements of regulatory institutions are critical to the delivery of their functions and their performance as well as to (re-)gaining trust of citizens and businesses. The issue of the governance of regulators is thoroughly discussed in Chapter 5.

The fundamental importance of ethics

Rules have inherently limited power to exert change, and seeking to make regulatory systems ever more precise and rigid, and enforcement ever stronger, is no guarantee of positive results in achieving intended outcomes. Flexibility and agility are essential to avoid excessive burden and barriers to activity and innovation, and avoid bureaucratic defensiveness and situations where the unwavering implementation of rules can lead to absurd situation, and harm trust and legitimacy. Just as the implementation of rules needs to be underpinned by transparent criteria (in particular grounded on risk, see Chapter 6) and by strong professional ethics in regulatory bodies – supporting ethical approaches within business operators is likewise essential, and goes beyond the enforcement of formal compliance (Hodges, 2018[51]).

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Notes

← 1.  It is worth underlining that given the sheer pace and the cross-cutting nature of technological changes, it is likely that the appropriate response will require a mix of regulatory approaches. As an example, self-regulation might well go hand in hand with co-regulation or guidance to provide some framework to business and mitigate the potential risks raised by the technology. Self-regulation can even be mandated by regulators through a regulatory measure. Similarly, it could be useful to combine regulatory sandboxes with regulatory guidance to reduce the level of uncertainty faced by business when launching a technological innovation.

← 2.  See on the use of AI for legal research and review and cf. the ongoing Government of Canada pilot on regulatory review using AI https://www.csps-efpc.gc.ca/video/ai-eng.aspx.

← 3.  See the OECD Briefing Paper “Regulatory quality and COVID-19: The use of regulatory management tools in a time of crisis” for more detail on how governments have responded to the crisis (OECD, 2020[9]). In addition, thousands of these COVID-19 measures have been described in detail by the OECD Policy Tracker: https://www.oecd.org/coronavirus/country-policy-tracker/#Containmentmeasures.

← 4.  Regulatory sludge: “excessive or unjustified frictions, such as paperwork burdens, that cost time or money; that may make life difficult to navigate; that may be frustrating, stigmatising, or humiliating; and that might end up depriving people of access to important goods, opportunities, and services.” (see Sunstein, Cass R. (2019), Sludge Audits, 27 April). Harvard Public Law Working Paper No. 19-21, Forthcoming, Behavioural Public Policy, http://dx.doi.org/10.2139/ssrn.3379367.

← 5.  https://www.oecd-ilibrary.org/governance/how-do-laws-and-regulations-affect-competitiveness_7c11f5d5-en.

← 6.  See e.g. (Tyler, 1990[54]) (Tyler, 2003[31]); (Kirchler, Hoelzl and Wahl, 2008[53]) (Kirchler, 2006[52]); (Blanc, 2018[28]).

← 7.  A report by the Scientific Council to the Government of the Netherlands prepared in the aftermath of the global financial crisis and considering how excessively “rigid” rules had failed to prevent harmful activities and products.

← 8.  See for example Health and Safety Executive (HSE) (2016), The effectiveness of HSE’s regulatory approach: The construction example (Prepared by Frontline Consultants for the Health and Safety Executive in 2013).

← 9.  see http://www.oecd.org/fr/gov/politique-reglementaire/oecd-global-conference-on-governance-innovation.htm.

← 10.  See also https://www.hsph.harvard.edu/ecpe/effective-risk-communication-strategies/.

← 11.  See the Summary Analysis of the Risk-Regulation Reflex, http://www.oecd.org/gov/regulatory-policy/48654345.pdf.

← 12.  https://www.oecd.org/gov/Recommendation-Open-Government-Approved-Council-141217.pdf.