Putting the “nudge” into government regulation

Regulations are rules that derive their authority from legislation and are a key lever for government in a “rules based society.” Well-designed regulation provides direction in areas such as responding to market failures, ensuring an appropriate safety net in place, and broadly supporting and maintaining the routines that underpins almost every aspect of our daily lives.

While most of us may take these rules for granted, we probably don’t give much thought as to how they come to be and the cost associated with maintaining the regulatory systems that underpin them.

Arguably, the benefits of a well-designed and maintained regulatory system are not immediately obvious to the citizen, however are often experienced through its effects on lower prices due to increased competition, greater peace of mind in saving and borrowing, increased safety, and confidence in a range of day to day purchasing decisions. The challenge for policymakers and government is ensuring that regulation and the regulatory systems that support them can adapt and respond to the changing social landscape and community attitudes.

The relationship between government, the community and businesses can be complicated at times, as all parties often have conflicting agendas and priorities. These conflicting priorities often become apparent when changes to regulations are considered. Take for example the NSW Government’s lockout laws.

Coinciding with the introduction of these new regulations, many argued that policymakers had gone too far in interfering in the daily lives of people living in inner Sydney. Not surprisingly, industry associations, businesses, and communities directly affected or concerned by these changes argued strongly that the introduction of new regulations – designed to reduce the harm associated with the consumption of alcohol and antisocial behaviour – were out of step with contemporary approaches to managing these social afflictions.

Regardless of one’s position on these regulations, this example highlights the challenges, disconnect with citizens, and conflicting priorities that policymakers and government need to navigate in order to design and introduce new regulations.

It’s without doubt that the role of the regulator is becoming increasingly complex as the lines between rulemaking, compliance and enforcement begin to blur. Compounding the challenge for regulators are the changing social attitudes as to what role governments should play in regulating our lives.

Government and policy makers have broadly acknowledged the limitations associated with traditional compliance and enforcement centered systems and frameworks. These include:

• People act irrationally: While various laws and regulations are in place, regulation has a limited impact when regulating extreme behaviour
• Cost of enforcement: The cost of regulating an industry or activity imposes burdens on both the citizen and government
• Fines and penalties justification: The changing political culture is influenced by a desire to protect individual freedoms and limit the role of government in people lives.

The challenge for policymakers and regulators operating within an era of fiscal and regulatory restraint is to identify cheap and politically effective strategies for regulation compliance that are driven by individual self-determination rather than costly and punitive compliance and regulations.

The future of regulation

The role of a contemporary regulator is changing. New disruptive business models such as the share economy, the exponential pace of technological change and the shrinking barriers between supplier and buyers are all challenging the relevance and legitimacy of traditional regulatory methods in these changing circumstances. Compounding these factors is a prevailing narrative that regulators and policymakers will ignore an industry or activity until it becomes large enough to require regulation. Arguably the reduced half-life of some industries and businesses is also making it increasingly challenging for regulators to keep pace with the changing landscape.

Faced with these challenges, regulators are still confronted with the challenges of protecting communities and citizens while promoting economic growth, innovation, competitiveness and job creation. Policymakers must identify and rely upon the most innovative, and least burdensome tools for achieving a balance between regulation on self-determination. The question is how.

Nudge theory – a new form of regulation

Governments, psychologists and economists have devoted significant effort to trying to understand how humans make choices. In recent years policy makers have been exposed to a range of emerging fields of decision-making science, such as behavioural economicsand nudge theory, that offer alternative approaches to designing and operationalising new approaches to regulation[1].

Recent strides in these disciplines have been adopted within the public and private sector to change the environment, or ‘choice architecture’ in which clients, consumer and citizens make decisions. “Nudges” are being used to help improve decision-making and spur positive behavioural change without substantial investment. When designing the regulatory frameworks systems using nudge theory, governments are confronted with a number of alternative considerations in order to maximise the effects of positive change. These include:

• Educate & keep it simple: Sometimes the first step in making the right decisions is articulating the outcome we wish to realise and identifying the choices we have to achieve it, including the consequences of each choice. This principle can guide policy makers and regulators on how best to design the choice architecture of policies and regulation by focusing on the cohorts or individuals on whom decisions may have the greatest impact – this is particularly the case in areas such as health and education. Understanding the audience in these domains, and knowing their beliefs and motivations, allows nudges to be specifically targeted towards cohorts. For example, targeting young female smokers through the onset of premature ageing and wrinkles is more effective than the fear of death or serious illness
• Incentivise & recognise positive behaviours: Sometimes a little encouragement in the right direction is all we need to make the right choices. Loss is more memorable than gain, and policymakers should not underestimate the impact that altering the price of our choices through levies and subsidies and payment mechanisms will have on shifting behaviour. At the same time, there is increasing recognition of the influence of non-monetary incentives to urge people towards action such as leader boards and positive feedback provided they reward the heart and the soul before the wallet. People are typically focused on the present and prefer smaller immediate payoffs to larger distant ones
• Structure choice: Faced with making a choice, people sometimes fail to do so due to the fact that other choices are expedient, or simply because they are overwhelmed by options. Policymakers need to consider designing and structuring choices in ways that assist people make the right decision. A simple example may be adopting defaults or “opt out” options to nudge people into making a particular decision such as organ donation. Another example is framing choices in a way that change theirrelative attractiveness often nudging people taking the ‘middle option’ such as health care packages
• Feedback loops: Sometimes our lack of awareness about our choices and their implications – particularly for others – can lead to undesirable behaviour. Feedback loops can assist in changing behaviours by providing individuals with information or data about their actions. An example of how these feedback loops work can be seen in a speed monitor strategically situated along the side of the road in high risk areas signalling to drivers their current speed. Displaying this information provides a feedback look that prompts the driver to self-regulate their speed

The establishment of behavioural insights units within Governments is providing significant insight and opportunity for regulators to draw on research into these types of policy levers in order to influence choices in decision-making and design regulation frameworks that take full advantage of contemporary regulatory design.

Design considerations for a new regulator.

Nudges offer policymakers and governments alternative levers to adopt when designing or delivering regulations. However, these strategies will only be effective if governments invest in exploring and testing alternative ways to equip authorities with the right capabilities to support these new approaches to regulation. Designing a contemporary regulator authority centers around a number of important considerations[2].

Reframing the regulations landscape: Identifying and quantifying the possible risks to citizens and markets and creating regulation to mitigate these risks is a key challenge for any regulator. Regulators that positively engage with citizens and markets can significantly reduce the time between a new service or product that is causing harm to a consumer and when the regulator finds out about the harm. Whilst bearing in mind not all citizens will a rational and logician view perspective on the world around them, the application of inclusive regulation can help increase citizen awareness and support them to make informed decisions.

Being on the front foot: Innovative technologies and business models can catch regulators off guard especially when these technologies and business models can scale up quickly. Without a means to sense and predict the next big thing, regulators risk playing catch-up and missing opportunities to engage early with these new services and products.

Guiding principles & minimum standards: Coming up with rules to simultaneously protect communities and citizens while facilitating the growth of new industries can be a significant challenge of policymakers and regulators. Regulators working at the front line of some of these new technologies and products may want to adopt industry guidelines for the development of new products and services. Alternatively, encouraging markets to develop a set of industry standards could provide a platform for regulators to determine clear rules or minimum standards by which products and service will be measured to.

Making regulation a purpose centered place to work: Attracting and retaining highly talented individuals in the public sector is a challenge. Regulator should consider how to reframe the role of a regulator within the context of regulation being a multidisciplinary vocation that drives the public good, and that draws on a diverse range of talent to support the agencies core purpose.

Consultation, consultation, consultation: Consultation can help the process of rule-making as well as leading to better outcomes. Regulators can use it to solicit expert perspectives from a range of sources to strengthen regulation, policies and guidelines so that they lead to the intended outcomes. In circumstances where there is significant choice to be made between alternative approaches, consultation can assist regulators to accurately assess the balance required.

Supporting footnotes

[1]Rethinking Red Tape, Deloitte 2012

[2]The Regulator of Tomorrow, Deloitte 2017