Sunday, January 17, 2016

Participatory governance in regulation making: How to make it work?

by Bhargavi Zaveri.

In December 2015, SEBI issued five discussion papers. Decisions on three of the five discussion papers were taken at the board meeting of SEBI held on January 11, 2016. As of today, SEBI has not published the responses received from the public or its responses to the public consultation process.1 This problem is present more broadly in the regulation-making process in Indian finance (Pattanaik and Sharma, 2015).

In recent years, there has been a great emphasis on strengthening the regulation-making process used by regulators in India. One element of this is a formal public consultation process. Effective public consultation processes are a powerful tool for reducing mistakes in the regulation-making process, and in reducing the dislocation caused by the sudden introduction of new law. However, the mere existence of a public consultation process does not, in and of itself, mean that the public will spend time and resources to comment and participate in the consultation exercise. A full ecosystem has to develop involving sophisticated private parties, who commit resources into the consultation process, and sophisticated persons in government, who utilise this effectively.

The extent and quality of public participation in a consultation process depends on four conditions.

Condition 1: Effective notice of the proposed regulation


The public cannot comment on a proposed regulation if they do not know about it. Barriers to information access can be blatant or subtle. Not making information available in an open format is an example of a blatant barrier. Examples of subtle barriers include cases where outdated information is not archived or the information is organised in a manner which makes it difficult for a user to access that information.

For example, an Indian regulator can initiate a public consultation process by publishing the proposed regulations in the official gazette. While the Indian official gazette has been recently digitalised and is therefore relatively more accessible, the chances that the public (or even stakeholders) will browse through the official gazette to respond to it, range from slim to none. On the other hand, if there is a concerted process whereby all financial regulators consistently put out notices on the gazette, and gave the gazette the role for which it was intended, then the public will make it a practice to look regularly at the gazette. This will be assisted by technological improvements such as RSS feeds and open APIs by the Gazette of India.

Some Indian regulators have made considerable progress on giving easy access to information about proposed initiatives. For instance, the website of Airport Economic Regulatory Authority (AERA) has a Consultations segment displaying all the active consultation papers in one place. The archives page of AERA's website too has a consultations segment which displays:

  1. All the consultation papers ever issued by AERA together with the dates on which the consultation opened and closed for each paper;
  2. Responses recieved and minutes of stakeholder consultation meetings, if any; and
  3. Orders issued pursuant to each consultation exercise.

Similarly, the website of Telecom Regulatory Authority of India (TRAI) has a dedicated section on Consultations, which organises all the consultation papers ever issued by TRAI subjectwise, shows the status of the consultation paper (whether it is ongoing or closed) and displays the responses received.

Condition 2: Institutional mechanisms outside the State


While information dissemination exercises are the responsibility of the regulatory agencies seeking public participation, they need not be limited to initiatives of the State alone. For instance, researchers at a US university have developed a platform called Regulation Room. The program collaborates with certain federal agencies whose rules are put up on the platform for discussion, aggregates comments and submits a detailed summary of the comments recieved to the regulators it has tied up with.

What is remarkable is not just that the program was concieved and is running, but that Federal agencies in the US actively encourage and collaborate with it, in addition to spreading information about proposed rules through other methods for dissemination of information mandated by law. We wonder how financial agencies in India might respond if an academic institution initiated such a platform.

Condition 3: Stakeholder resourcing


Easy access to information does not automatically translate to effective public comment:

  1. Effective public comment requires reasoned arguments supporting it. Depending on the field of regulation, comments may require to be supported by research, collection and analysis of data and legal arguments. This requires the public to expend time and resources toward understanding the subject or if they are experts, putting together their research and experience in a coherent form for processing by the regulator.
  2. The kind and volume of stakeholders who are likely to respond also entirely depends on the field of regulation. Therefore, while a discussion paper on net neutrality has elicited close to 2.4 million comments, a discussion paper on the proposed regulatory framework for convertible securities will likely not attract as much attention. In other words, the breadth and technical nature of the proposed regulation will influence the extent of participation.
  3. Some elements of stakeholders' responsiveness are a direct function of what the regulator does. For instance, the time given for responding to proposed regulations, the quality of the information published in the public domain, the readability of the discussion paper, etc. will influence the decision to participate or otherwise. If the regulator displays sound intellectual capabilities, it is more likely to elicit responses from the best people, as has happened with the TRAI document on net neutrality.

Condition 4: Responsiveness of regulatory agencies


The last stage of participatory governance - that of the regulator publishing comments recieved from the public and responding to them - is perhaps the most crucial. It is important that the regulator completes the loop on public consultations because:

  1. It enhances the transparency of the consultation process. It is important that people know what motivated changes from the draft that was published for their comments.
  2. If the regulator persistently rejects public comments without assigning reasons, it leads to a breakdown in conversation between the regulator, the regulated and the beneficiaries of the regulation. There is no incentive left for responding to documents put out by the regulator.
  3. The exercise of responding to public comments brings clarity on the objective of the proposed regulation and the reason for preferring a selected policy tool over others. This helps the regulator and also answers future challenges to a selected policy tool.

While several empirical and qualitative analyses have been done on the the extent of influence of public comments on draft regulations (West 2005, Kerwin 2003 and Golden 1998), the methodologies have been open to criticism because it is nearly impossible to identify what prompted a change in a regulation. However, where, over a period of time, the outcome of a series of discussion papers or draft regulations have been identical or largely similar to the draft proposed by the regulator, it is safe to infer that public comments have not influenced regulation-making at all.

Some examples of good State responsiveness


Regulators in developed countries spend considerable time and resources in bothering to respond to public comments on proposed rules.

For instance, recently, the SEC issued a regulation which seeks to strengthen the technology infrastructure of participants in the US securities markets and enhance SEC oversight of such infrastructure. The text of the regulation is 11 pages. However, the press release containing the text of the regulation runs into 200 pages. The first 189 pages of the press release are dedicated to the comments received from the public on the proposal which was put up for public comments and SEC's response to those proposals. This is standard practice with all rules made by the SEC.

Similarly, the Australian Prudential Regulatory Authority generally issues a separate document dedicated to its response to comments received from the public on consultation papers that it puts up for discussions. For instance, see here.

As discussed above, TRAI and AERA also have dedicated sections reflecting the public comments received in the course of the consultation exercise.

While AERA reflects its response to the public comments in its orders, none of the other Indian regulatory agencies have transitioned to a rulemaking framework where the regulator responds to public comments. However, the examples of AERA and TRAI show that some Indian regulators are ahead of financial agencies on issues of participatory governance.

Some examples of bad State responsiveness


Recent research on the regulations and circulars issued by SEBI from June 2014 to July 2015 (Sharma and Pattanaik, 2015) found:

1. An analysis of 27 regulations issued by SEBI showed
  1. It conducted a public consultation on 12 of them; and
  2. It did not publish the public comments recieved in any of the 12 public consultation processes.
2. An analysis of 23 circulars issued by SEBI showed:
  1. It conducted a public consultation on four of them; and
  2. It did not publish the public comments recieved in any of the four public consultation processes.
3. There was no case where there was a change in the final regulations in response to public comments.

While the above study is silent on whether SEBI published its response to the responses recieved from the public, the website indicates that no response was published.

The trend seems to be continuing even after July 2015. For instance, we, at NIPFP, responded to two of the five discussion papers published by SEBI in December 2015 [link, link]. We resourced this work with two teams of four people each, which spent an effective working time of three full days, researching on the subject, looking up international precedents and consulting with external experts, so that we could collate our responses and submit them within the indicated timelines. The cost to make these responses was 24 man-days each.

While it is the absolute prerogative of the State to accept or reject comments received from the public,  the people who spend time and resources on preparing a response expect that their comments are considered. Today, we have no way of verifying whether our comments were considered and whether we should similarly galvanise resources the next time a regulator initiates a consultation process. This is precisely the kind of break-down that lack of State-responsiveness can lead to.

An ecosystem for participatory governance


A takeaway from this discussion is that the extent of public participation in a State-initiated consultation process is a function of various elements. While some of these elements (such as the technical nature of the regulation) are not within the control of the State, most of them are. This begs the question of how does one go about fostering an ecosystem which enhances public participation in consultation exercises.

Many countries have taken the approach of fostering this eco-system through the primary law. For instance, the Administrative Procedure Act, 1946, a US federal statute, requires Federal agencies to subject delegated legislation to a public notice and comment process. Delegated legislation which does not go through the entire notice and comment process has been struck down by US courts by applying an 'arbitrary and capricious' standard.

Subsequent agency-specific legislation and executive orders have led US Federal agencies to disseminate information in a user-friendly manner. For instance, the Open Government Directive2 issued by the President's Office requires Federal agencies, amongst other things, to:

  1. Publish information online in an open format that can be retrieved, downloaded, indexed, and searched by commonly used web search applications;
  2. Create an Open Government Webpage which enables people to give feedback on and assessment of the quality of published information.

Indian examples


A couple of recent Indian legislations have an in-built overarching legislative mandate of transparency. For example , the Airports Economic Regulatory Act, 2008 mandates the airports regulator to `ensure transparency in exercising its powers and discharging its functions' by holding consultations with stakeholders, allowing them to make submissions to the authority and documenting and explaining all decisions taken by it. Perhaps, the existence of this principle in the primary law has led to AERA being a relatively far more responsive regulator. Similarly, the Electricity Act, 2003 requires that all delegated legislation under the act be subject to `previous publication'.

The absence of similar principles in the Indian financial legislative framework is glaring. A first attempt of this kind can be found in the Indian Financial Code (IFC) which was the outcome of the recommendations of the Financial Sector Legislative Reforms Commission led by Justice B.N. Srikrishna. IFC1.1 (which is a refined version of IFC) codifies a comprehensive process to be followed by financial regulators when making delegated legislation. This process entails the (a) publication of a proposed regulation with a statement of objectives, (b) a cost-benefit analysis of the proposed regulation, (c) a notice and comment process, (d) publishing the responses received and a general account of the regulator's counter-responses to the feedback recieved in the consultation exercise, and (e) approval of the regulation at the highest level within the regulator.

In December 2013, the Finance Ministry released a Handbook which serves as a guide towards the improving the regulatory governance of financial sector regulators.3  The Handbook requires the financial sector regulators to:

  1. Consider all comments while framing the final regulations;
  2. Publish all comments received; and
  3. Publish a general account of the response to the representations along with the final regulations.

Thus, while attempts to foster an eco-system for participatory governance have been taken by the Indian Government, RBI and SEBI have not implemented this. Owing to this, Ministry of Finance regulators now lag the practices found in AERA, TRAI, and WDRA.

References


West, William (2005), "Administrative Rulemaking: An Old and Emerging Literature", Public Administration Review, Vol.65, No.6.

Kerwin, Cornelius M. (2003), "Rulemaking: How Government Agencies Write Law and Make Policy.", Washington, DC: Congressional Quarterly Press.

Golden, Marissa Martino (1998), "Interest Groups in the Rule- Making Process:Who Participates? Who Gets Heard?", Journal of Public Administration Research and Theory, Vol. 8(2).

Pattanaik, Arpita and Sharma, Anjali, Regulatory governance problems in the legislative functions at RBI and SEBI, Ajay Shah's blog, 23 September 2015.

Footnotes

  1. Disclosure: NIPFP has responded to two of the discussion papers published by SEBI in 2015. Back
  2. Memorandum on the Open Government Directive dated December 8, 2009 issued by the President's Office to the heads of executive departments and agencies. Back
  3. The Handbook was issued as a follow-up document to a resolution passed by the Financial Stability and Development Council in October 2013, which requires financial sector regulators to adopt the recommendations of the Financial Sector Legislative Reforms Commission, which do not require legislative changes. Back


The author is a researcher at the National Institute for Public Finance and Policy.

4 comments:

  1. following could be of interest on this subject:

    http://www.techpolicydaily.com/technology/privacycon-what-the-ftc-chose-to-ignore/?utm_source=newsletter&utm_medium=paramount&utm_campaign=cict

    views on how to avoid such situations could be insightful. thanks

    ReplyDelete
    Replies
    1. An impact analysis of a proposed rule cannot begin with a foregone conclusion. Here, the FTC seems to have already decided on what approach to use for protection of consumer privacy. A CBA exercise must begin with laying out all the policy options on the table and then measuring the costs and benefits of each. Perhaps, the CBA methodology can be codified in the internal manuals of regulators who perform cost-benefit analyses.

      The US rulemaking procedures also have a provision enabling interested persons to petition the regulator for formulation, amendment and repeal of rules. However, I am not sure how much petitioning can really help on a broad question of which end of the spectrum should privacy-oriented rules lean towards.

      Finally, the fact that the FTC has published responses with opposing views should help when the proposed rule is actually put through the formal notice and comment process.

      Delete
  2. The U.K. fin. regulator did it via the Retail Distribution Review (RDR) - a set of regulatory changes aimed at improving standards of financial advice, and consumers’ understanding of the cost of investing. But all these are developed financial markets. It'll be difficult in the Indian fin. market where we have hardly achieved any "break-even" in terms of financial literacy. So that leaves only the stakeholders to participate; and assessing biases and vested interests that might creep in while commenting might be a task in itself! It might work better if the regulator makes it mandatory for college students/academia that deliver courses on Economics. Also with wide prevalence of social media amongst students - high chances this concept might go upstream (to Gen X) and downstream (Gen Y) getting it the required mass/comments for the regulator to consider this seriously!

    ReplyDelete
  3. Every comment comes with its own set of biases. Even when a consumer responds to a proposed regulation, his response is also coloured with a bias. There is no basis for making a general presumption that one set of biases is worse than another.

    Having said that, it is a good idea to inculcate the culture of discussions on proposed regulations in an academic institution, something that has not been done in what are arguably the best institutions in India. However, while this may increase the scale of response to proposed regulations, it does not assure quality.

    ReplyDelete

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