Regulatory Capture

Industries have strong reasons to shape the rules that apply to them, and they have the money, expertise and access to do it. Capture can take several forms. Direct forms include bribery, lobbying and the practice of hiring regulators once they leave office, sometimes called the revolving door. Softer forms arise when regulators depend on the industry for information, staff and technical advice, or when daily contact leads them to adopt its worldview, which is sometimes called cultural capture. The signs are lenient enforcement, rules that favour established firms and block new entrants, and slow responses to evident harm. Safeguards include funding that is independent of the industry, cooling-off periods for staff moving between sectors, published meetings with lobbyists, diverse advisory panels, strong legal accountability of the regulator and public scrutiny. Economist George Stigler's work on the idea in the early 1970s made it widely known. A captured regulator offers the look of protection while the public carries the risk.

A financial supervisor repeatedly rates a large lender as low risk despite warnings from its own examiners. It emerges that its senior officials have regular private meetings with the lender's executives, and that two of them later join the lender at higher pay. A review recommends a cooling-off period and published records of such meetings.