Regulation: balancing the tight rope between politics and independence
Using a recent article from the Cayman Islands as the starting point, the concept of the independence of the regulator is discussed.
In the Cayman Islands last week, the article, “ICTA board seeks greater role in hiring”, caught our attention. ICTA, the Information and Communications Technology Authority, is the telecoms and broadcasting regulator in the Cayman Islands. According to the article, which was published on 15 August, the ICTA board of directors was concerned about the hiring practices that were being employed and were demanding to be more involved in the recruitment process for staff for the Authority (Source: Cayman Compass). The article also highlighted reports of irregularities in the recent appointment of at least two senior staff members, which might have triggered the board’s taking a stance on the matter.
According to the Information and Communications Technology Authority (ICTA) Law 2011, the ICTA board of directors “is responsible for the policy and general administration of the affairs and business of the Authority” (s. 4(1)). However, and at the very least, it must be disconcerting that the Authority’s board is not involved in the recruiting of employees for its office
Consequently, this issue may lead telecoms firms and Caymanian residents to question the independence of the ICTA, which is critical consideration in any regulatory regime, and a topic that has been widely discussed globally. This post briefly explores the concept of ‘independence of the regulator’, and where appropriate highlights questionable practices that appear to have been adopted in the Cayman Islands.
Importance of independent regulation
International best practice for regulation, especially telecoms/ICT regulation, tends to advocate for an independent regulator, which is considered to be more effective in overseeing the sector at hand. Typically, regulators are required to balance the needs of firms in the sector, consumers and the government policies that have been enshrined in legislation. At no point is it encouraged, or to be expected, that the regulator would represent the interest of one or two groups, at the expense of the others. In essence, a key tenet of regulation is non-discrimination.
It is through adhering to a posture of non-discrimination that regulators tend to truly gain the respect of the parties they oversee and serve. It also means that all parties will not be happy with the decision or approach taken by a regulator all the time. However, it is that independence of the regulator, especially in decision-making, that fosters legitimacy of the regulatory framework, investor confidence, and reduces concerns about regulatory risk.
The slippery slope of regulatory capture
On the flipside of independence, and something that regulators and the framework under which they operate tend to be vigilant about, is the perception of bias, and ultimately, that of ‘regulatory capture’:
Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure; it creates an opening for firms to behave in ways injurious to the public (e.g., producing negative externalities)… (Source: Wikipedia)
With regard to regulatory capture by industry players, such as telecoms firms, this situation may occur when, among other things, regulators take kickbacks from firms, or are intimidated by the clout or knowledge that certain firms possess, or might wish to support one or more entity over others in the market.
Similarly regulators can be perceived as not being independent of their governments, in a number of ways. Examples include when governments do not maintain (to an appreciable extent) an arm’s length approach in matters related to the operation of the Office of the Regulator, and in the extent to which governments seek to influence that office’s decisions, outside of the policy direction provided in legislation.
In the case of the Cayman Islands, the source of the concern is in respect of the recruiting practices for the ICTA. Under the ICTA Law 2011 as amended, the Governor in Cabinet appoints the members of the board of directors, its Chairman, and the Managing Director of the Authority. Interestingly, and unlike other countries that require directors to be considered experts in fields relevant to telecoms or ICT, in the Cayman Islands, the law stipulates that the directors “hold office at the pleasure of the Governor in Cabinet” (s. 5(1)(b)). More importantly, section 7 (2) appears to give the Governor in Cabinet sufficient latitude to dismiss directors without cause.
Having said this, and noting that in most countries, the appointment of directors or commissioners for telecoms regulatory organisations tends to be political appointments, it ought to be disconcerting that senior staff appointments at the ICTA are not under the remit of the Authority and its directors. That situation is likely to lead to concerns about:
- the person or agency to which employees might be truly answerable
- the extent to which appointments might be politically motivated, and finally
- the actual and perceived the competence and independence of the regulator to undertake its functions.
Current literature and best practice highlight a number of ways through which independence of the regulator can be promoted and nurtured, some of which were mentioned above. They include
- establishing well-defined professional criteria for appointments
- subject to formal review, prohibiting the removal of regulators, except for clearly defined reasons, and
- providing and ensuring that regulators are a distinct statutory authority, and are free of ministerial control.
The ability of a regulator to maintain its integrity and the respect of the sector is critical. Though provisions might be prescribed in legislation to promote regulatory independence (such as those suggested above), the successful operation of any the framework in practice requires all actors to adhere to the rules.
Image credits: digitalart (FreeDigitalPhotos.net)